[NMLS SAFE] 19, LTV vs CLTV vs HCLTV and the DTI Ratios

Lesson 19 of the free Quibank NMLS SAFE course. This lesson is arithmetic, and the exam knows exactly where you will slip. Not in the division — in choosing what goes on the bottom of the fraction, and what is allowed on the top. Three loan-to-value ratios share one denominator: plain LTV, combined LTV, and high combined LTV.

They differ only in what you count on top. The denominator for all three is the lesser of the sales price or the appraised value — never the higher appraisal. Build them in order. One: pick the denominator, the lesser of price or appraised value.

Two: LTV counts the first lien only. Three: combined LTV adds the balance actually drawn on subordinate financing. Four: high combined LTV uses the entire credit line, drawn or not, because the borrower can redraw it tomorrow. Exam version.

A 500,000 purchase that appraises slightly higher, a 400,000 first mortgage, and a 50,000 line of credit with 20,000 drawn. The answer: 80, 84, 90. The denominator is the purchase price, because it is the lesser figure. FHA changes two things and only two.

The denominator gets a name — the adjusted value — but it is the same idea, the lesser of contract price or appraised value. And the numerator is the base loan amount: if the borrower finances the up-front mortgage insurance premium, that financed premium is excluded from the top of the fraction. Exam version. Contract price above the appraisal, and a borrower who finances the up-front premium.

The answer: 96.5% — base loan over appraised value. Both wrong answers come from grabbing the contract price, or adding the financed premium. The rule: lesser value on the bottom, base loan on top. Two debt ratios, differing only in the numerator.

The front-end, or housing ratio, is the full housing payment over gross monthly income — and full means principal, interest, taxes, insurance, and any homeowners association dues. The back-end, or total debt ratio, adds every other recurring monthly obligation. Both sit on gross income, never take-home. Exam version.

Gross income of 7,200, a housing payment that already includes taxes, insurance and association dues, plus a car payment, a student loan and a credit card minimum. The answer: 26.5 and 35.7. The two classic errors are using principal and interest alone, and quietly dropping one of the three other debts. Last piece, and it is not arithmetic.

Lien priority is first in time, first in right — it follows the recording order, not the size of the loan. So on a rate-and-term refinance, when the old first mortgage is paid off and its lien released, a line of credit recorded after it moves up into first position automatically. Exam version. A rate-and-term refinance with an existing line of credit staying in place.

What has to happen for the new loan to close in first position? The answer: the line-of-credit lender signs a subordination agreement, and it is recorded with the new mortgage. Nothing here happens automatically. Lock these in.

Every loan-to-value ratio sits on the lesser of price or appraised value. LTV is the first lien; combined adds what is drawn; high combined takes the whole line. FHA uses adjusted value and the base loan, excluding a financed premium. Housing ratio is the full payment; total debt adds everything else.

And subordination must be signed and recorded. Next lesson: pricing a loan — points, buydowns, per-diem interest, and what the annual percentage rate actually includes. Practice every one of these free at quibank.com/en/mlo. See you in lesson 20.