The combined loan to ratio value is a formula that is used by lenders to determine the default risk when more than one loan is attached to an asset. The most common application of this value is used with real estate deals. Often, it is calculated when homeowners wish to take out a second mortgage, or when it is necessary for some reason to obtain two loans to cover the initial purchase of a home.
The basic formula for calculating a combined loan to ratio value is simple. Potential lenders will verify the value of each loan and add the totals together. The combined total provides the lender with the amount of indebtedness that the homeowner will carry in the event that the second loan is granted. This grand total of debt is compared to the total value of the property that is serving as the collateral on both loans.
Ideally, the value of the property will exceed the total indebtedness. Many lenders also prefer to have a wide combined value than simply enough property value to offset the total amount of indebtedness. When this is the case, the amount of risk to the lender is lessened and the chances that the second loan or mortgage will be extended greatly improves.
An example of an acceptable combined loan to ratio value would be when the property involved has a current market value of $500,000 US Dollars (USD). The homeowner already has a loan in place to cover $250,000 USD of the total purchase cost, but needs to borrow another $100,000 USD. Cash in hand covers the remainder of the purchase price, and thus is not included in the calculation. With a total indebtedness of $350,000 USD on property currently valued at $500,000 USD, the combined loan to ratio value is 70%. Many lenders would consider this to be an acceptable ratio. In fact, many lenders would consider a value in the 75 to 85% range to be ideal.
Lenders will consider more than just the combined loan to ratio value when choosing to extend that second loan. Other factors such as the credit rating and history of the homeowner, current income level, and projections that the property will at least hold its value for the duration of the loan period will also be considered.
