The year 2020 saw a wave of homeowners attempting to ease their cash flow with a mortgage refinance. In fact, according to a Forbes Advisor article, about $2.149 trillion in mortgage refinancing occurred in 2020.
But while mortgage lenders continue to pitch mortgage refinance options with relatively low interest rates, not every homeowner qualifies for a mortgage refinance, let alone one with a staggering low interest rate. The problem being that a wide range of factors goes into the individual mortgage rate a lender offers a borrower. One such factor is the combined loan-to-value ratio (CLTV).
The Combined Loan-to-Value Ratio
The relationship of the dollar value of all loans that are secured by a certain property to the estimated value of that property is referred to as the combined loan-to-value ratio. This ratio provides a lender an insight to the risk of default that a loan to a particular borrower poses to the lender due, in part, to the degree to which the property that's being refinanced is already leveraged.
The CLTV is similar to the loan-to-value ratio (LTV), which is a ratio that relates a mortgage amount to a property's appraised value. The LTV ratio equals a mortgage amount – the amount borrowed – divided by an appraised property value.
Both LTV and CLTV ratios are used in mortgage lending to determine whether a borrower is qualified to obtain a home loan.
CLTV Formula and Calculation
The CLTV equals the current combined loan balance ÷ current appraised value.
Assume, for example, that your house currently appraises for $250,000. You have a loan balance of $150,000 and you want to take out a $50,000 home equity loan. Your CLTV is equal to $150,000 plus $50,000, divided by $250,000, which equals .8, or 80 percent.
The CLTV and Loan Approval
A lender's primary concern with any loan is earning a profit. So the lender imposes controls to make it more likely that a borrower will be able to comply with the terms of a loan. Controls are risk-reducing measures, such as a CLTV cap, which limits the risk that a mortgage refinance poses to the lender.
Each lender sets risk acceptance criteria for every business transaction, including a mortgage refinance. These criteria define some aspects of the overall risk level of a defined business activity for a period, such as a quarter of a financial calendar.
In the case of the CLTV, a lender sets a criteria that defines the maximum acceptable combined loan-to-value ratio of any property that's subject to a mortgage refinance. The criteria are a reflection of the fact that a lender assumes risk with each loan it makes. In most cases, a lender sets a maximum CLTV as a baseline approval criteria for any prospective borrower. Should the applicant's CLTV be above that value, the person becomes ineligible for a mortgage refinance.
The CLTV ratio for your mortgage will always be equal to or greater than the LTV ratio, resulting in mortgage lenders having higher maximum limits for the CLTV compared to the LTV ratio.
- Forbes Advisor: Mortgage Interest Rates Forecast: Will Rates Rise in 2021?
- HUD.gov: HUD 4155.1 Chapter 5 Section C Borrower Secondary Financing
- Experion.com: Understanding Loan-to-Value Ratio (LTV)
- Bank of America: How to Calculate Home Equity and Loan-to-Value (LTV)
- ConsumerFinance.gov: Homeowners Protection Act (PMI Cancellation Act
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.