Debt To Income Ratio And Loan Modification

by Tandy
(GA)



How will my debt to income ratio affect a loan modification? Do percentages apply when doing a loan modification? How low should I expect the mortgage company to lower my interest rate if it is already 5.535%?


Mortgage Loan Modification Answer:

by Loan Modification Expert - Dan North

In a Making Home Affordable Modification does have rules regarding the debt to income ratio after the loan is modified. If your debt to income is greater than 55% after the modification you will be required to get debt counseling from a HUD certified debt counselor.

The debt counseling is paid for by HUD so there is no charge to you but you will have to attend several meetings with the counselor and will probably have to read some materials and work out a budget and handlings to lower your debt to income ratio.

Your loan modification would not be stopped if you did not attend but it is a requirement that you see the HUD certified counselor. I have not seen any government guideline that covers failure to appear for debt counseling, only that you get signed up and scheduled for debt counseling. The debt counselor is only paid after the counseling so I am sure that you will be called by the counselor and reported if you do not attend.

How Low Can I Modify My Interest Rate To?

  • Under the HAMP program the 1st mortgage can be lowered to as low as 2% to lower your monthly mortgage payment to 31% of your gross income.


  • If after lowering the interest rate to 2% your mortgage payment is still higher than 31% of your gross monthly income then the length of the loan is extended to as long as 40 years.
  • If after extending the loan to 40 years your mortgage payment is still higher than 31% of your gross monthly income now your unpaid principal balance will have a portion deferred interest free to finally lower your monthly mortgage payment to 31% of your gross monthly income.


How Do You Know If The Lender Will Approve The Loan Modification After The Trial Modification?


Your lender will do what is called a Net Present Value Test (NPV Test) and it is pass or fail. Basically the test determines if the lender saves more money by modifying the loan or foreclosing on the mortgage.

The test is a computer program and the math takes a college degree to understand so once I get someone to program it for me I will add it to the website but until then it is a judgment call on what lenders have modified in the past and how many bank owned foreclosures are in the area.

Even if you make all your Trial Loan Modification payments it is possible that the loan modification will not be approved if the lender feels he will save more money by foreclosing.

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starstarstarstarstar 		DTI and self-employed
by: Anonymous

I'm also with Citi - though with a much lower principle. I am trying (now one-year PLUS) to get a HAMP or in-house modification at a lower rate.

I am also self-employed, but am constantly getting mixed responses with the Debt-to-Income calculations.

Traditionally, it seems they are using DTI based on your GROSS monthly income. Does this change when self-employed? ...the issue with my situation is that I am a sole proprietor, service-oriented business. I therefore have complete control over the "cost" decisions on a monthly basis - meaning any "adjusted gross income" could be increased based on what I decide to spend for the business each month. (The only costs that are standard are travel costs - which is basically gas.) So, would I be able to convince my lender that, tho self-employed, I should still be using my GROSS monthly income for DTI calculations?

Also, are the In-House modifications more flexible (meaning not bound strictly by the 31% rule)?

Also, what is the "62% rule"? Does that mean that housing costs (31%) plus other debt should NOT go over 62%? If that's the case, THEN WHAT?

Mortgage Loan Modification Answer:

By Mortgage Loan Modification Expert - Dan North


Unless your DTI is very high it is not a big issue. On the HAMP program if after a modification your ratio is 55% or higher you are still elligible but must take credit counseling. If your total monthly debt and expenses are above 62% even after a modification then you do have a financial situation that will likely result in a re-default on your mortgage.

What you really need to do is lower your DTI by whatever means possible. If you can lower your cost of doing business and still make the same gross income why wouldn't you do that anyway? That would be a start on increasing your income. Normally that is something that can be put off for a short period but generally will have to be spent or suffer income loss, so normally is not a solution.

Yes, when self employed the answers is to make more income and increase the profits. Perhaps there is something you can do there and should.

If you have extensive unsecured debt bankruptcy may be something to look into but it can also mean going out of business for yourself. Debt restructuring may be an option but you will take a hit in credit for a short period of time and that could be a problem if you depend on credit for your business. Look into car loan modification, lowering homeowner's insurance, selling the boat and lowering other monthly expenses etc....

In-house modifications are not restricted by the HAMP guidelines and there is some more flexibility, but if you can not afford your home Citi will not modify and will expect you to short sell or execute a DIL (deed-in-lieu of foreclosure).
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starstarstarstarstar 		Interest only fixed pmt for loan mod?
by: Paul

Hello Dan North

Does Wells Fargo offer a 10 year fixed interest only program at 2% for 40 years under the loan modification program? Or can you elaborate on any type of interest only program WF has?

Wachovia Bank gave me a loan mod back in 2009 but put me on a 1 year I/O only to have the pmts go up each year for the next 7 years but I had to take the loan mod or I was out of my house, next increase is $400 next year per month. Can WF get me on a I/O fixed for 10 years? My kids will be grown and I will be moving.

Hi Paul I moved your comment and answer to its own page at Will Wells Fargo Modify To An Interest Only Fixed Pmt?
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starstarstarstarstar 		Property Tax and Home Owner Insurance
by: kristen d

If I currently pay my own property taxes and insurance, would I be required to make these 2 payments with my new HAMP agreement or can I still pay them on my own?

Mortgage Loan Modification Answer:



Your Loan Modification Agreement will include setting up an Escrow Account that will make the payments on your property tax and homeowner insurance. This is a requirement of the HAMP Guidelines.

Dan

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