The combined loan-to-value ratio (CLTV Ratio) is the ratio of all loans secured by a property to the property's value. For example, suppose an individual is purchasing property valued at $200,000, and this individual takes out two loans for the property, one for $100,000 and another for $50,000. The combined loan to value ratio would be 75%, (($100,000 + $50,000) / $200,000).
Lenders use the CLTV ratio to determine the risk of default by prospective homebuyers when more than one loan is used. In general, lenders are willing to lend at CLTV ratios of 80% and above to borrowers with a high credit rating.
Loan-to-value (LTV) and CLTV are two of the most common ratios considered during the mortgage underwriting process. Most lenders impose maximums on both values, above which the prospective borrower is not eligible for a loan. The LTV ratio considers only the primary mortgage balance. Therefore, in the above example, the LTV ratio is 50%, the result of dividing the primary mortgage balance of $100,000 by the home value of $200,000.
Most lenders impose LTV maximums of 80%, as Fannie Mae and Freddie Mac do not purchase mortgages with higher LTV ratios. Borrowers with good credit scores can get around this requirement but must pay private mortgage insurance (PMI) as long as their primary loan balance is greater than 80% of the home's value. This insurance protects the lender from losing money if the home's value dips below the loan balance
Primary lenders tend to be more generous with CLTV requirements. Returning again to the above example, in the event of a foreclosure, the first and primary mortgage holder receives its money in full before the second mortgage holder receives anything. If the property value dips to, say, $125,000 before the borrower defaults, the primary lienholder still receives its full $100,000, while the second lienholder receives the remaining $25,000 (even though it is owed $50,000). The primary lienholder shoulders less risk in the case of declining property values and therefore can afford to lend at a higher CLTV.
High CLTV limits allow buyers to keep down payments low without paying PMI, by getting a second mortgage. Having said that, whether getting a second mortgage or paying PMI results in a better deal varies from buyer to buyer.
Because the second lien holder accepts greater risk in the event of default, the interest rate on a second mortgage is almost always higher than the interest rate on a first mortgage. If you're considering getting a second mortgage, research interest rates using a mortgage calculator. This will give you a better estimate of what is the most affordable situation for you long-term. Buyers seeking a low down payment should price both scenarios — getting one mortgage at a high LTV and with PMI versus getting two mortgages —and go with the option that makes the most financial sense.