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Understanding Combined Loan-to-Value Ratio for Home Equity Loans

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 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 balance is $350,000, and you want a $50,000 home equity loan, your CLTV would be 80%.

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

While the loan-to-value ratio (LTV) includes only your primary mortgage balance, the CLTV considers all obligations that use the property as collateral. This can include multiple home equity products.

For instance, if your primary mortgage balance is $350,000 and your home is valued at $500,000, your LTV would be 70%.

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

Lenders use the CLTV to determine your eligibility and loan terms for home equity products. Here’s why it matters:

• Eligibility: Most lenders allow borrowing up to a CLTV of 85%, though some may go higher or lower.
• Borrowing Limit: Your CLTV limit impacts how much you can borrow. For example, if your primary mortgage LTV is 75% and the lender’s maximum CLTV is 85%, you can only borrow 10% of your property’s value.
• Other Requirements: Higher CLTVs may come with stricter eligibility criteria, such as higher credit scores and lower debt-to-income ratios.
• 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:

• Borrow Only What You Need: Determine exactly how much you need and avoid borrowing more to keep your CLTV low.
• Maintain a Solid Credit Score: Aim for a credit score of at least 620, though higher scores may be required for better rates.
• Explore Other Options: Consider alternatives like building up savings, 0% APR credit cards, or personal loans that don’t use your home as collateral.
• Shop Around: Compare 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 help you understand where you stand and identify areas for improvement. If necessary, take steps to improve your credit, such as paying down credit card balances and resolving past-due debts.

Once your credit is in good shape, weigh the pros and cons of tapping into your home equity and explore all options to ensure it’s the best decision for you.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. We are here to help you with all your home equity loan and HELOC needs.

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