CLTV
CLTV = Combined Loan To Value
Let’s say you house is valued at $400,000. You have a 1st trust deed of $300,000. You also have a 2nd loan of $80,000, and a 3rd of $20,000. The CLTV is the percentage of all loans to the value of the house. In this case, the CLTV is 100%.
If someone asks you to lend them $20,000 on a $400,000 house, it may sound alright. But if you know the CLTV, and it is 100%, it would be very high risk. Equity is the value of the house minus all the loans. In this case, there is the equity is zero. There is no equity. You may think $20,000 is not a big loan to lend someone on a house worth $400,000, but if you in the 3rd position, with a CLTV of 100%, it’s very high risk.
Let’s say the borrower defaults on any one of the loans. The house goes to sale and is sold for $380,000. The loan in 1st position will get paid off first, then the 2nd loan. There is nothing left to pay the 3rd loan. You are out of luck. That’s why it’s important to know the CLTV.
The higher the CLTV, the higher the risk, the higher the interest rate and fees will be charged to the borrower. Most of the loans in 3rd position or higher make their money upfront with fees because if the borrower defaults, chances are their loan will not get off. They have to cover that risk by charging high points and fees upfront.