What is Combined Loan to Value (CLTV)?
The Combined Loan to Value (CLTV) is an underwriting ratio that measures risk by comparing the total secured loan balance on a property (i.e. liens) to its appraised value as of the current date.
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How to Calculate Combined Loan to Value (CLTV)
The combined loan to value, or CLTV ratio, is an underwriting metric used by real estate lenders to determine the risk of a proposed borrowing.
In particular, lenders use the combined loan to value ratio (CLTV) in scenarios where there is an existing lien against the underlying property asset, i.e. there is more than one secured form of financing.
The term “lien” is defined as a lender’s claim and right to seize possession of an asset belonging to the borrower until the entire debt obligation is fulfilled.
Since multiple secured loans cause the risk to all participants to rise, the CLTV ratio measures the default risk of the borrower, while factoring in the existing liens on the property.
Generally speaking, a lower CLTV ratio implies less risk for the lender, because there is a greater percentage of the property value not being borrowed against (and vice versa for a higher CLTV ratio).
The CLTV ratio is therefore intended to mitigate the lender’s downside risk potential and minimize the losses incurred in the event that the borrower defaults, i.e. misses an interest payment on a loan.
The process of calculating the combined loan to value ratio (CLTV) is as follows.
- Calculate the Total Balance of Existing Secured Loans on the Property
- Determine the Appraised Value of the Property, i.e. Current Fair Market Value (FMV)
- Divide the Total Balance of Secured Loans by the Appraised Property Value
Combined Loan to Value Formula (CLTV)
The combined loan to value (CLTV) ratio is as follows.
Where:
- Total Secured Loan Value → The current outstanding balance of the secured loans (i.e. existing liens) on a given property.
- Appraised Property Value → The market value of the property as of the present date based on a formal appraisal.
To convert the CLTV ratio from decimal notation into percentage form, the output must be multiplied by 100.
For example, suppose a homeowner with a primary mortgage of $200k is requesting a home equity loan of $50k with a lien placed against the same property.
If the home is currently appraised at $500k, the implied combined loan-to-value (CLTV) ratio is 50.0%.
- Combined Loan to Value Ratio (CLTV) = $250k ÷ $500k = .50, or 50.0%
