What is the difference between CLTV and LTV in home equity loans?

The more you know about personal finances, the more confident you can feel about making decisions that benefit you. Understanding your financial position and how things work is a genuine superpower. 

Let’s put two more tools in your toolbelt. We'll cover two important terms associated with home equity loans: loan-to-value and combined loan-to-value. 

What does LTV mean, and why does it matter?

LTV stands for loan-to-value ratio, which helps lenders assess risk when approving a mortgage or home equity loan application. LTV compares mortgage balance to the current value of your home.

For example, if your home is worth $400,000 and your mortgage balance is $200,000, your LTV is 50%. 

Here’s how to calculate LTV. Divide the mortgage balance by the value of your home. Then, multiply the result by 100 to get a percentage. Using the numbers above, here’s how that looks:

Step 1: 200,000 / 400,000 = .5

Step 2: .5 x 100 = 50%

Why does LTV matter? Mortgages are secured loans. That means there is collateral that acts as a safety net for the lender. In this case, the collateral is the home and property you’re buying. If you don’t repay the loan, the lender could take the property and sell it to recover its losses. That safety net is why home loans are typically the cheapest way to borrow. But it only works if you owe less than the value of the property. If you owe more than your home is worth, there is a greater risk that the lender could lose money. 

The vast majority of home loans are approved for an amount that’s less than 100% of the market value. How much less? That depends on the lender and the loan.

Let’s look at two families who have just applied for a home equity loan. 

• The Clarks' home is worth $300,000, and they still owe $275,000 on the mortgage. 

• The Griffin family's home is also worth $300,000, and their mortgage balance is $175,000.

Here's what the lender comes up with when it figures the LTV associated with each loan application:

Clark family LTV: 92%

Step 1: 275,000 / 300,000 = 0.92

Step 2: .92 x 100 = 92% 

Griffin family LTV: 58%

Step 1: 175,000 / 300,000 = 0.58

Step 2: .58 x 100 = 58% 

In terms of LTV, the Griffin family represents a lower risk, both statistically and financially:

• The less you owe on your home compared to its value, the lower the chance you’ll lose it to foreclosure.

• If the Griffins are unable to pay their mortgage, the lender could sell it and recover the money they are owed. 

What is CLTV, and how is it different from LTV?

The combined loan-to-value ratio (CLTV) includes the balance on all outstanding loans against the property. You’d add your mortgage balance to your home equity loan (or the amount you’re applying for) and compare it to your home’s current market value. 

Let’s go back to the Griffins to see how that breaks down.

• Current mortgage balance: $175,000

• Current home value: $300,000

• Desired home equity loan: $80,000

• CLTV: (175,000 + 80,000) / 300,000 - .85 (or 85%)

Pro tip: The opposite of LTV is home equity. Home equity is the percentage that you own. LTV or CLTV is the percentage that you owe. Find your home equity by subtracting your mortgage balance from your home’s market value.

How do lenders use CLTV to decide how much you can borrow?

Lenders know how much they are willing to lend, and they look at your CLTV to find out whether the loan you want would be under that limit. For example, if your lender’s CLTV limit is 80%, you could apply for a home equity loan that, when added to your mortgage balance, would keep your total home debt under 80% of your home’s market value. Lenders also look at CLTV when they decide what interest rate you qualify for.

A higher CLTV typically means more risk for the lender. Lenders like it when you have a bigger stake in a transaction. Generally, the more you have to lose, the more confident lenders are that you'll do everything within your power to make all payments as promised. Along with your home equity, income, credit history, and debt-to-income ratio (DTI), your CLTV gives a lender a sense of how much risk they're taking on with the loan. 

The lower the CLTV, the better your odds of approval at a lender’s lowest rates. 

What’s considered a good CLTV?

If you’re not looking for a new loan, a good CLTV is anything under 100%, because you don’t owe more than your home is worth. 

If you haven’t applied for a home equity loan yet but you want one, a good LTV might be 70-75% or lower. That’s because if your LTV isn’t below the lender’s CLTV limit, you won’t be able to borrow more. At 70%, you’d be below most lenders’ CLTV limits and have some room to borrow.

Tips to improve your CLTV before applying

If you want to improve your CLTV before applying for a loan, here are steps you can take:

• Reduce debt. Pay down your mortgage or other loans secured by your home.

• Look at a long-term plan. Make home improvements or renovations that boost your property's market value.

• Change your borrowing plan. Borrow less money.

• Give it time. Wait for your equity and home value to build.

LTV and CLTV are just two of the factors considered as underwriters weigh the risk of making a loan. Understanding how they work is the best way to position yourself in a way to make your home equity loan application stand out from the crowd, and to snag the lowest rates and best loan terms.