The Ledger / Qualifying
How Lenders Actually Compute CLTV and DTI
Two ratios decide most equity applications. Both are computable by hand, from documents you already have, before you speak to anyone.
Ellis Nakamura · July 15, 2026
Compute both ratios yourself first. If either is outside the range your lender states, the application's outcome is largely determined before it is submitted — and you will know why.
- +Both ratios are simple arithmetic on documents you already hold
- +Knowing them in advance turns a mysterious decision into a predictable one
- +They identify which lever — balance, value, or other debt — actually matters for you
- −The appraisal, not your estimate, sets the value input and can come in lower
- −Lender definitions of includable income and debt vary in the details
- −Meeting both ratios is necessary but not sufficient — credit and reserves also apply
Equity lending decisions feel opaque from the outside. Most of the outcome, however, comes down to two ratios you can compute yourself in about ten minutes using documents already in your possession.
Ratio one: combined loan-to-value
CLTV measures how much of the property is already borrowed against, counting every lien.
CLTV = (all liens secured by the property) / (appraised value)
"All liens" means your first mortgage plus any second mortgage, plus the full limit of any line of credit — not the drawn balance. This surprises people. An undrawn line still occupies the space, because the lender must assume it can be drawn.
Each lender sets a maximum CLTV for each product, and it varies by product, credit tier, occupancy and property type. That ceiling, times the appraised value, minus existing liens, is the arithmetic ceiling on what you can borrow. It is the calculation our position tool on the front page performs.
Two practical notes:
The appraisal sets the value, not you. Your estimate, an online valuation, or what a neighbour's house sold for are all inputs to a guess. The lender's appraisal is the number that goes in the formula, and an appraisal below expectation is the single most common reason an application shrinks or fails. If your plan only works at an optimistic value, it does not yet work.
Undrawn lines count. If you hold an open HELOC you do not use, closing it may materially improve CLTV for a new application. That is a real, actionable lever that people routinely overlook.
Ratio two: debt-to-income
DTI measures whether the payments fit the income.
DTI = (total monthly debt payments) / (gross monthly income)
The numerator is generally the monthly obligations that appear on your credit report plus housing costs — mortgage principal and interest, property taxes, homeowners insurance, any HOA dues, plus minimum payments on cards, auto loans, student loans and other instalment debt. It typically excludes things that do not appear as credit obligations, such as utilities or groceries.
The denominator is gross — before tax — monthly income. For salaried borrowers this is straightforward. For self-employed, commissioned or variable income it is not: lenders generally average over a period and require documentation, and the figure they use is often lower than what you consider your income. If your income is variable, ask early and specifically how the lender computes it, because that single definition can decide the application.
Critically, the DTI that matters includes the new payment you are applying for, not just your current obligations.
Running your own numbers first
You need: the payoff balance on every lien, a realistic value, and your monthly obligations and gross income.
Compute both ratios. Then ask any prospective lender for their maximum CLTV and DTI on the product you want. Those are questions they answer readily, and the two comparisons tell you the likely outcome before an application, a credit pull, or an appraisal fee.
Which lever to pull
Once you know both numbers, the constraint identifies itself:
- CLTV is the binding constraint → the levers are reducing lien balances, closing an unused line, or a higher-supported valuation. Value is the hardest to influence honestly, and improving it is a matter of genuine condition, not presentation.
- DTI is the binding constraint → the levers are retiring a monthly obligation entirely, or borrowing less. Paying a small instalment loan to zero can move DTI more than paying down a much larger balance, because the ratio counts the payment, not the balance.
- Both are comfortable but you were still declined → the remaining factors are credit history, reserves, income documentation and property type. Ask for the specific reason; you are generally entitled to it in writing.
What we would do
Compute both before contacting anyone. Ask each lender for their published maxima on the specific product. If you are outside on either ratio, address the binding one first rather than applying repeatedly and collecting credit inquiries and appraisal fees for an answer you could have predicted.
How to use this entry: every figure above is illustrative arithmetic built on stated assumptions, published so you can substitute your own. Rates, fees, ceilings and eligibility vary by lender, property, credit profile and jurisdiction, and change over time. Confirm against your own Loan Estimate, disclosure forms and agreement before acting. Home Finance & Credit Lines is an editorial desk, not a lender or adviser; this is reporting, not personalised advice. Borrowing secured against your home puts your home at risk.
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