What Is Combined Loan-to-Value Ratio?

The combined loan-to-value ratio (CLTV) is a crucial metric that lenders use to evaluate your application for a home equity loan or home equity line of credit (HELOC). It is calculated by adding your primary mortgage loan balance to your desired home equity loan amount or HELOC credit limit, then dividing that sum by your home’s value.

For example, if your home is appraised at $500,000, your mortgage loan balance is $350,000, and you want a $50,000 home equity loan, your CLTV would be calculated as follows:

CLTV = ($350,000 + $50,000) / $500,000 = 0.8 or 80%

Combined Loan-to-Value Ratio vs. Loan-to-Value Ratio

CLTV is an extension of the loan-to-value ratio (LTV) used when you take out a mortgage to buy a home. The key difference is that LTV includes only your primary mortgage balance, while CLTV includes all obligations that use the property as collateral, such as home equity loans or HELOCs.

Using the previous example, the LTV of your primary mortgage would be:

LTV = $350,000 / $500,000 = 0.7 or 70%

Why Combined Loan-to-Value Ratio Matters for Home Equity Loans

CLTV is important because it helps lenders assess the risk associated with lending you money. If you default on your home equity loan or HELOC, the primary mortgage lender gets first claim on the proceeds from selling the home. The home equity lender can only recoup what remains after the primary mortgage is satisfied.

Here’s how lenders use CLTV to determine your application:

• Your eligibility: Most home equity lenders allow you to borrow up to a CLTV of 85%, though some may go higher or lower.
• How much you can borrow: Even with significant equity, a lender’s CLTV limit may impact your borrowing capacity.
• Other requirements: Higher CLTVs may come with more stringent eligibility criteria, such as higher credit scores and lower debt-to-income ratios (DTI).
• Interest rate: Higher CLTVs pose more risk to lenders, often resulting in higher interest rates.

How to Improve Your Odds of Qualifying for a Home Equity Loan

To maximize your chances of getting approved for a home equity loan or HELOC with favorable terms, consider the following steps:

• Only borrow what you truly need: Determine exactly how much you need and avoid borrowing more than necessary to keep your CLTV low.
• Ensure your credit is solid: Aim for a credit score of at least 620, though higher scores may be required for better terms.
• Consider other options: Explore alternatives like building up savings, 0% APR credit card offers, or personal loans that don’t use your home as collateral.
• Shop around: Compare preapproved offers from multiple lenders to find the best deal for your needs.

Check Your Credit Before You Get Started

Before applying for a home equity loan or HELOC, check your credit score and report. This will give you an idea of where you stand and what you need to improve. Address any inaccuracies on your credit report and take steps to improve your credit score, such as paying down credit card balances and catching up on past-due debts.

Contact O1ne Mortgage for Expert Mortgage Services

At O1ne Mortgage, we are dedicated to helping you navigate the complexities of home equity loans and HELOCs. Our team of experts is here to provide personalized advice and support to ensure you get the best possible terms for your needs.

Call us today at 213-732-3074 for any mortgage service needs. Let us help you make informed decisions about your home equity options.