How LTV and CLTV Will Affect Your New Home Loan

by Kelly Richardson
LoanPage.com Columnist

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LTV, or Loan-To-Value, and CLTV, Combined Loan-To-Value, are two ratios that are commonly considered when measuring the credit risk of a potential borrower. Here's a quick rundown of how LTV and CLTV will affect your mortgage terms as you apply for a new home loan.

Mortgage lenders use the term loan-to-value to refer to the principle balance of the underlying loan divided by the related property's appraised value or purchase price, whichever is less. This mathematical equation, generated during the pre-qualification process, should equal a percentage of around 80 or so. A new home loan with a loan-to-value ratio of over 80% is considered high-risk and will typically require you to purchase mortgage insurance. However, LTVs under 80% usually reduce some of the costs of the loan.

The Loan-To-Value Risk Factor for Home Loans

• Purpose. Loan-to-value ratio is figured and applied in order to help defray the costs of a possible home loan default, a fairly common occurrence.
• Fannie and Freddie. To meet underwriting guidelines of Fannie Mae and Freddie Mac, LTVs must be under 80%.
• Your Credit Score. If you have a better than average credit rating, you may be able to receive a new home loan with a high LTV.

If the property has more than one mortgage, then the CLTV ratio is applied. This ratio takes into account the total of all liens on a property when computing the ratio. Basically, your mortgage lender will add up all liens on the property before dividing by the purchase price.
Combined Loan-To-Value: The Big Picture

CLTV Variations. Due to the rising cost of real estate, many mortgage lenders have programs that let you borrow 100% of the CLTV.
• 80/20 Rule. The most common 100% CLTV loan is the 80/20 split mortgage, where the 80% represents the LTV.

Understanding this simple figure will help you make an informed decision on a new home loan. Ask your potential mortgage lender to explain every aspect of your LTV or CLTV during the pre-qualification process.

Sources:
U.S. Department of Housing and Urban Development

About the Author
Kelly Richardson covers the local education and technology scenes in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.