National Real Estate Exam (PSI)Real Estate CalculationsHard
A home is valued at $400,000. The buyer already has a first mortgage of $280,000 and wants to take out a second mortgage (HELOC). If the lender allows a maximum combined loan-to-value (CLTV) of 80%, what is the maximum amount of the second mortgage?
- A$80,000
- B$40,000
- C$20,000
- D$120,000
Show answer & explanationAnswer & explanation
Correct answer: B. $40,000
Maximum total debt allowed = $400,000 × 80% = $320,000. Subtract the existing first mortgage of $280,000: $320,000 − $280,000 = $40,000 maximum second mortgage.
Why the other options are wrong
- A. This exceeds the CLTV limit if added to the existing mortgage.
- C. This is only half of the correct maximum amount.
- D. This would push the CLTV well above 80%.
Combined Loan-to-Value (CLTV)
CLTV measures the total of all loans secured by a property as a percentage of the property's value, used to determine how much additional financing is allowed.
- CLTV = total loans ÷ property value
- Subtract existing loans from maximum allowed total to find room for new financing
- Lenders cap CLTV to limit risk on secondary financing
Memory trick: Combine all loans, then compare to the value cap