What do lenders assess using the Combined Loan to Value (CLTV) ratio?

The Combined Loan to Value (CLTV) ratio is a critical metric used by lenders to evaluate risk associated with lending. Specifically, it provides insight into the total amount of loans secured by a property relative to its appraised value. By calculating the CLTV, lenders can determine how much of the property's value is encumbered by debt, which helps them assess the likelihood that a borrower may default on their loans.

When the CLTV is high, it suggests that a borrower has less equity in the property, increasing the risk for the lender. This is because borrowers with low equity might be more likely to walk away from the property if they face financial difficulties, leading to higher default rates. Thus, lenders use this ratio to gauge the potential for repayment issues, making it an essential metric for managing risk in lending decisions.

Other factors such as the total equity in a property, creditworthiness of the borrower, or future appreciation of property value might influence lending decisions, but they are not the primary focus of what the CLTV ratio assesses. Instead, its main purpose revolves around understanding the risk of default by analyzing the level of leverage in relation to the property's value.