Combined Loan to Value

By: EconomyWatch Content   Date: 8 February 2010

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Combined Loan to Value (CLTV) is a ratio used by lenders to determine the risk of default by prospective home purchasers in case of more than one loan. Generally, lenders are willing to lend to borrowers having a CLVT of 80% and above. The ratio refers to the percentage of total mortgage debt outstanding to the total value of the mortgaged property.

Importance of Combined Loan to Value

Combined Loan to Value is a key risk factor used by lenders to take a decision about sanctioning or approving a mortgage or a housing loan. Since the risk of default is inherent in all lending decisions, an increase in the CLTV ratio warrants stricter lending guidelines. In some cases, lending agencies ask borrowers with high CLTV ratios to take up mortgage insurance to protect the lender from default risk. This in turn raises the cost of taking the loan.

A low CLTV ratio allows lenders to consider high risk borrowers with lower credit scores or a history of late mortgage payments or insufficient reserves. Borrowers with high CLTV ratios are granted loans if their credit scores are good and they have a satisfactory mortgage history. Some lenders also sanction loans to borrowers having a CLTV of 100% or more if their credit rating is excellent.

In the United States, mortgage loans conforming to Fannie Mae and Freddie Mac guidelines are limited to CLTV ratios of 80% or less. Loans to borrowers having a CLTV ratio of more than 80% are subject to private mortgage insurance.

CLTV is not the only factor considered by lenders before sanctioning a loan. They also consider the credit rating, the history of the homeowner and his current and future income before sanctioning a second loan or lien on a property. The misuse of lending norms and increased sub prime lending or lending to people with low credit scores and high CLTV (in some cases 100%) is believed to be responsible for the US credit crisis of 2007-2009.


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