It seems within the past two years the phrase ‘refinance’ has been replaced with ‘loan modification’. The new popularity of this term is causing many homeowners to explore the possibility of lowering their mortgage payments using this technique. When done properly, many have been able to achieve the same or even better results without the expense of refinancing.
Up until recently, it was really unknown as to the criterion banks were using to evaluate loan modifications for approval. As time passed and the popularity of modifications exploded, a consistency in the approval process became evident. The calculation or formula is called the DTI (debt to income) ratio. The DTI is the relationship between an individual’s monthly income divided by their monthly expenses. The magic number is somewhere between 31%-40%. Basically, for a loan modification to be successful, your bank will be comparing your monthly income against your expenses. Keep in mind that your income is represented as gross, not net. If you can demonstrate that at the least 1/3 of your gross monthly income is used for a living expenses (including your housing payment), you are on your way to a successful loan modification.
To calculate this formula, your bank will require you to complete a monthly budget. Here you must itemize your expenditures each month. The entries will include food, gas, utilities, credit card payments, medical expenses, etc. In addition, you must validate your income by providing pay stubs and tax returns. You can experiment with the numbers on your own before you submit them to get an idea of your potential eligibility.
A few words of caution with regards to qualifying for this process. Don’t make the mistake of grossly misrepresenting your monthly expenses too high in an effort to convince the bank to significantly reduce your mortgage payment. Although it might appear to make sense, it will not work. If your DTI ratio is too high, the bank will simply deny your modification. This reason for this is because, in some cases, the bank might feel that even if they reduce your payment it might not be enough to solve the problem and they are only delaying the inevitable, which is foreclosure.
You have many other options and some versatility when preparing your financial analysis and constructing your DTI ratio. Many times if your qualifying ratio is too high, you can offer the bank a notarized letter from a family member who will offer financial support. This can dramatically improve your qualification if your income is too low. Remember to ask these questions in the very beginning of the process. There are many other options as well to help keep that DTI ratio in line and maximize your chance for approval.
In addition, your bank will need some other information from you. One item will be a financial hardship letter detailing the events leading up to your request for a modification. Was it the loss of your job? Was it a reduction in income? Did you have unforeseen medical expenses? Basically, you need to explain why you were able to pay the mortgage before and why you are struggling now.
Naturally, there are other factors involved in getting approved for a loan modification. However, they are secondary to the DTI calculation which is the most important element in the preparation of your case. If the numbers don’t make sense to the bank, they will deny your loan modification regardless of how well you have constructed a hardship letter and prepared the other elements. You get one chance to present you story. You have to get it right the first time.
The bank really does want to help you but it must make sense for them too. Although it might be emotional for you, it is very scientific for them.
Once you have a basic understanding of these guidelines, your chances for a successful loan modification are greatly improved. My do it yourself guide will provide you will all of the tools to maximize your potential for a successful loan modification.