Confused about your debt ratio and whether you are qualified for a loan modification? Don’t feel bad-most homeowners do not really understand this calculation and are not sure how to figure out if their own debt ratio is acceptable for a loan modification. However, this is one of the most critical approval criteria when applying for a lower mortgage payment, so it makes sense to learn how to figure yours, what is acceptable and then use this information to prepare you application
What is debt ratio anyway and why is it used to determine who will qualify for a loan modification? Basically, this is a mathematical calculation that uses a percentage to demonstrate if your housing expenses is affordable or if you are in a financial hardship situation. This calculation helps the banks determine if a loan workout would be beneficial and if and when a borrower should be considered for a loan modification.
All lenders, servicers and even the federal plans have guidelines for debt ratio. Based on the financial statement provided by the homeowners, the debt ratio will be calculated and if the result does not fit the approval guidelines, the application could be turned down immediately. Most loan mod programs require that the current mortgage payments-including the taxes, insurance and any HOA dues exceed 31 to38% of the household gross monthly income.
The debt ratio calculation is also used to determine what the new, modified mortgage payment will be. The goal is to modify the existing loan so that the new payment equals an affordable percentage of the monthly income, that way the borrower will not be likely to fall behind again. If your debt ratio is too low, you may not be deemed to be in a real financial hardship situation. A high debt ratio means that your current payment is not affordable, and you could be eligible for a loan modification.
This may all sound like Greek to you, and especially if you are having a hard time trying to figure out exactly what your lender needs to see from you in order to approve your loan mod application. There is an easier and less stressful way to prepare your application, thousands of borrowers have used a loan mod software program that actually does all the important calculations for you. Your debt ratio, new target payment, new modification terms, are all figured automatically and immediately for you. Most importantly you will see if you are passing the approval guidelines or need to make some adjustments to your monthly budget. Then use this fine tuned information to prepare your final application-and be confident that you have a good chance of approval!
Susan Gregory is the author of two resource books for homeowners and real estate professionals, the best selling 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 loan modification 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.myloanmodficationcenter.com for more information.