Combined Loan-To-Value Ratio (CLTV Ratio)
Candlefocus EditorWhen a lender considers the risks associated with lending money to purchase a property, the CLTV ratio is a big indicator of the risk of a borrower defaulting and the possible return of an investment. A CLTV ratio of 80% or less is generally accepted by most lenders as a minimum ratio for them to consider lending money. For example, if a borrower is looking to purchase a property for $100,000, and their down payment (cash) and other lienable assets total $20,000, then their CLTV ratio is 80%, which is within an acceptable range for lenders. The higher the CLTV ratio, the more risky the loan is, since it means the borrower is using more borrowed money than their assets would suggest.
The importance of monitoring the CLTV ratio comes into particular relevance in times of market downturns or bubbles, such as the real estate bubble of 2008-2009. During such times of economic upheaval, markets, especially the real estate market, can contract rapidly leading to defaults and foreclosures. By monitoring the CLTV ratio of the associated properties, lenders are able to manage the risk of their exposure to properties with a high risk of defaulting or declining in value.
In sum, the Combined Loan-To-Value Ratio (CLTV Ratio) is an important assessment tool used by lenders to gauge the risk of a borrower defaulting on a loan. Many lenders will only accept a CLTV ratio of 80% or below when considering a new loan and monitoring the CLTV for signs of instability is especially important during times of economic unrest like bubbles or recessions.