when the bubble began to heat up many of these same companies took steps to allow customers to get around putting 20 down some lenders raised ltv caps or did away with them completely offering mortgages with 5 down payments or less while others kept ltv requirements in place but raised cltv caps often to 100 this maneuver enabled customers to take out second mortgages to finance their 20 down payments 2
the foreclosure spike beginning in 2008 underscored why cltv is important having skin in the game such as a 100 000 initial cash outlay for a 500 000 house provides a homeowner with a powerful incentive to keep up with mortgage payments if the bank forecloses a homeowner not only loses their home but also the pile of cash they paid to close on the property requiring equity in the property also insulates lenders from a dip in real estate prices special considerationssome homebuyers choose to lower their down payment by receiving multiple mortgages on a property which results in a lower loan to value ratio for the primary mortgage also because of the lower ltv ratio many homebuyers successfully avoid private mortgage insurance pmi whether it is better to obtain a second mortgage or incur the cost of pmi depends on the particular circumstances of the borrower consequently because the second mortgagor assumes more risk the interest rate on a second mortgage is typically higher than the interest rate on a first mortgage 1example of a cltv ratiolet s say you are purchasing a home for 200 000 to secure the property you provided a down payment of 50 000 and received two mortgages one for 100 000 primary and one for 50 000 secondary your combined loan to value ratio cltv is 75 100 000 50 000 200 000 loan to value vs cltvloan to value ltv and cltv are two of the most common ratios used 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 while the cltv factors in all loans on the property such as home equity loans and home equity lines of credit helocs most lenders impose ltv maximums of 80 borrowers with good credit profiles can circumvent 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 pmi protects the lender not the borrower from losses when a home s value falls below the loan balance 3primary lenders tend to be more generous with cltv requirements considering the example above in the event of a foreclosure the primary mortgage holder receives its money in full before the second mortgage holder receives anything if the property value decreases to 125 000 before the borrower defaults the primary lien holder receives the entire amount owed 100 000 while the second lien holder only receives the remaining 25 000 despite being owed 50 000 the primary lien holder shoulders less risk in the case of declining property values and can afford to lend at a higher cltv 4