Loan-to-value (LTV) and CLTV are two of the most common ratios used during the mortgage underwriting process for a home loan. Most lenders impose maximums on both values. If a prospective borrower is above it, they likely will not qualify for a loan. The LTV ratio considers only the first mortgage balance. Most lenders use an LTV maximum of 80% because Fannie Mae and Freddie Mac will not purchase mortgages with higher LTV ratios. Borrowers with excellent credit may circumvent this requirement but will have to pay private mortgage insurance (PMI) as long as their primary loan balance is above 80% of the home’s value. PMI protects the lender from losses when a home’s value falls below the loan balance.
CLTV stands for Combined Loan-to-Value, and it includes all loans on a property instead of just a first mortgage. CTLVs can usually be higher than regular LTV because, in foreclosure, the primary mortgage holder receives its money in full before the second mortgage holder receives anything. The primary lienholder has less risk in the case of declining property values and can afford to lend at a higher CLTV.
As an example, suppose an individual is purchasing a home for $400,000. To secure the property, she provided a down payment of $100,000 and received two mortgages for $250,000 (primary) and $50,000 (secondary). Her combined loan-to-value ratio (CLTV) is therefore 75%: ($250,000 + $50,000) / $400,000).
Some home buyers choose to lower their down payment by getting multiple mortgages on a property, which results in a lower loan-to-value ratio for the primary mortgage. Because of the lower LTV ratio, many home buyers avoid private mortgage insurance (PMI). Whether it is better to obtain a second mortgage or incur the cost of PMI varies per individual. It would be best if you discussed it with your loan broker. Still, one thing to consider is that the second mortgagor assumes a higher risk than the first. Therefore, the interest rate on a second mortgage is generally higher than the interest rate on a first mortgage.
CLTV refers to Combined Loan to Value, and TLTV stands for Total Loan to Value. As for the difference, there isn’t one. When lenders talk about CLTV, they are usually referencing the first and second mortgage loan amounts concerning the property’s value. Sometimes they might use TLTV in the case where there was a third lien on the property.
Now that you know more about the difference between LTV, CLTV, and TLTV, if you still have questions, call Primary Residential Mortgage. We’ll guide you through the home loan process. It’s not near as complicated as it seems. Let us know how we can help you today!