When you apply for a loan modification you must prove that you meet the approval qualifications, and this includes your debt ratio. This term may be a new one to you, but in the world of loan mods it is a key calculation that plays a big part in determining which homeowners will qualify for a loan workout and which ones will not. Your bank will do a mathematical calculation using the financial information you provide to them to determine what your ratio is and whether it falls within the standard approval guidelines. It just makes sense to do this calculation yourself ahead of time so that you can make any necessary adjustments to your figures before your bank has a chance to review your information and possible turn down your request.
The debt ratio for loan modification qualification can vary slightly depending on the bank and also on the actual loan mod program you are being considered for. However, the federal plan called HAMP uses a standard approval guideline that over 90% of lenders are applying to their borrowers who apply for this loan mod plan. The goal of HAMP is to achieve a new payment that equals just 31% of the borrower's gross monthly income. In order to qualify for this very low interest payment plan, your current mortgage expenses must fall above the 31% figure and your loan must be able be modified using standard methods so that the new payment will equal this percentage.
Here are the 3 Steps to Calculate your Loan Modification Debt Ratio:
- Complete your Current Financial Statement form detailing all of your gross monthly household earnings and your monthly housing expenses. This includes your house payment (first lien only, not any second mortgage you may have-that is a separate calculation) monthly property tax amount, monthly homeowners insurance and any HOA dues. You can take your annual property tax bill and annual homeowners insurance premium and divide it by 12 to arrive at the monthly figure.
- Now, divide the total housing expense amount by the total gross monthly household income. For example if your total housing expense (house payment, property taxes, homeowners insurance and HOA dues) equals $1800 and your monthly gross income is $3600, then 1800 divided by 3600 equals 50%.
- Now, verify that your current housing expense equals more than the 31% debt ratio qualification as required by HAMP. If your current debt ratio is less than that figure, then you will not qualify for the government program.
Now that you know what your debt ratio is and whether you are meeting the standard loan modification qualification guidelines, you need to determine if your loan can be modified using the standard methods. This is a more complicated formula, so you may want to use a loan mod software program to help you with this part. This helpful tool will calculate all the figures for you automatically and show you immediately if you are passing standard approval guidelines for loan modification approval. Having all this valuable information ahead of time will give you a big jump start on getting your loan mod approved because you will know just how to prepare your application correctly.
Susan Gregory is the author of two resource books for homeowners and real estate professionals, The Complete Loan Modification Guide Kit and The Stimulus Book-HAMP & HAFA Edition. She also teaches workshop training classes for the federal programs to help real estate professionals assist homeowners with home retention and exit strategies. The Complete Loan Modification Guide kit provides a valuable resource for borrowers that includes a step by step handbook, required forms, and a software program that mimics the federal approval triggers for loan modification. An advocate for homeowners, Susan also offers free 30 day email support for all of her clients who purchase her publications. Thousands of homeowners have been helped using these materials. Visit http://www.myloanmodificationcenter.com for more information.
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