Describe the "CLTV" (Combined Loan-To-Value) ratio.

The Combined Loan-To-Value (CLTV) ratio is calculated by comparing the total amount of all loans secured by a property to its appraised value. This metric is important in the realm of consumer lending because it provides lenders with insight into the risk associated with extending credit based on the amount of property equity a borrower has. A higher CLTV can indicate a greater risk for lenders, as it suggests that the borrower has less equity in the property relative to the outstanding loans, potentially making them more vulnerable to default.

For example, if a borrower has a first mortgage of $300,000 and a second mortgage of $50,000 on a home appraised at $400,000, the CLTV would be calculated as follows: ($300,000 + $50,000) / $400,000 = 0.875 or 87.5%. This means that 87.5% of the home's value is leveraged through loans, which is a critical figure for both lenders determining eligibility for new loans and for assessing the overall financial risk involved.

Understanding CLTV is essential for both borrowers and lenders, as it helps guide decisions regarding loan approval, interest rates, and mortgage insurance requirements.