Do I Qualify for a Loan Modification?
Homeowners facing foreclosure may consider loan modification a possible solution but often wonder whether it’s worth the time and effort. Many dismiss the option, mistakenly assuming they can’t possibly qualify for one reason or another – perhaps they already received a foreclosure notice and think it’s too late, they’re too far behind on their payments to ever catch up, or they believe their bank stands more to gain by foreclosing on them.
The truth is that you won’t know whether you qualify until you actually apply for the loan modification and discuss the possibility with your lender or legal representative. The best that this short blog post can do is to reveal the types of information the lender is likely to examine in reviewing your application:
- A statement showing your willingness to keep your house. Your lender wants to see that you are committed to a long-term solution.
- A hardship letter describing the event that has made your monthly mortgage payments unaffordable. Hardships can include loss of job, reduction in pay, medical illness, costly medical bills, a sudden and significant interest rate increase on an adjustable rate mortgage (ARM), and so on.
- Your ability to afford a reasonable lower monthly payment. Lenders have all sorts of ways to lower your monthly payment, including dropping the interest rate, spreading payments over a longer time period (say 40 years rather than 30), reducing the balance due, forgiving late payment penalties and fees, and rolling missed payments into the balance due. If the lender is unable or unwilling to reduce the monthly payment to an amount you can afford, you won’t have a successful loan modification – nor would you want to.
- Supporting documentation, including W-2’s, current credit report, pay stubs, federal income tax returns, bank statements, and so on.
To determine whether you qualify for a loan modification, most lenders are going to take a close look at your debt to income ratio (DTI) – your monthly debt payments divided by your gross monthly income. (Debt payments do not include what you spend on groceries, utilities, clothing, gas, and so on.) The back-end ratio consists of all your debt payments (including house payment, car payment, credit card payments, and so on). The front-end ratio covers only your monthly house payment including anything you pay into escrow to cover property taxes, homeowner’s insurance, and any homeowner association fees (HOA).
Debt Ratio = Total Monthly Payments / Gross Monthly Income
Although your lender may have different guidelines, the FHA recommends that your back-end ratio not exceed 41 percent and your front-end ratio not exceed 29 percent. This is a pretty good guideline to follow in determining whether your new, lower monthly mortgage payment will be truly affordable.
A more conservative approach to calculating debt ratios is gaining some support. It involves generating the DTI using net pay instead of gross pay – in other words, basing the calculations on your take-home pay. This makes sense – after all, the only money you really have to spend is your net take-home pay, not your gross pay. You probably won’t see this new approach gain nationwide support, because it would further tighten lending restrictions and disqualify many would-be borrowers, but it is out there and something to be aware of. Personally, it’s what I suggest people look at when applying for any credit, especially when considering a major monthly payment like a mortgage.
Remember: You want to qualify for a loan modification only if the modification is going to leave you with a truly affordable monthly mortgage payment. You don’t want your lender qualifying you if the loan modification is simply going to put you back on the path to losing your home.
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Ralph R. Roberts, GRI, CRS |
Homeowners should ask themselves if an attorney is actually working on their case and since its illegal for any attorney to guarantee the outcome of any case, how is it that everyone throws the word guarantee around? (Most likely NOT being said by attorneys, rather those who haven’t a clue of what they’re doing.) More likely they’re NOT involved with an attorney and they use that word to falsely assure the homeowner that their hard earned money will be returned. TIP: Attorneys do not have “money back guarantees.”
Why not deal with experienced professionals from the very start? An expert will know if the consumer even has a shot at success. Experienced mortgage bankers with underwriting backgrounds are the only way upfront, that you can ever know if your loan will be approved…the same if true for loan modification. Don’t just believe that some intake interviewer will know this. All that persons job is is to gather data, your check and turn your file in to someone who is supposed to be able to determine your chances…the person you initially speak with should be highly qualified to do this and not raise your hope or delay your answer.
I need some help I fell behind due to me getting hurt on disability now plus I have 3 children with a disability as well with the high cost of living help put me in the hole the state of New Mexico said I can get help from them I make to much on disability but it take all I have to pay for lights gas food insurance doing this for 11 in my household so money is hard to come by I went on a payment plan that my mortgage came up once pay that fee I have say do feed my children or keep my lights or gas or phone on I get $3.200 my house is $2.200 time I pay that there not much to live on so I can not keep up with the payment plan I can rent nothing any cheaper with this big of family if I could find a place I live in a small town I may have file for 13 if I can come up with away to save this home fast the mortgage will not work with me at all I also need to know your cost for helping me do you have a payment plan so please email me today if you can please Thank You
i fell behind in my mortgage due to my mother passing away back in march 07,i had a hardship just fell on me and its seems as i never been able to recover from that i decided that bankergy was my only answer well to my surpise my lawyer didnt not get my house payment lower to wwhere i could alford,actually my payment went up and my monthly payment for the bankergy was so high as well i was not able to keep gas in the car or food on the table for my children, it was so hard ,i love my home and being a single mother and grand mother i just want a fresh start to stay in my home and to give my children a chance to have a backyard please if you would consider my application i will ever so grateful thanks and god-bless for everything
Louie–
Not true. I work for a tax attorney who offers a money-back guarantee and he has been in business for 20 years!!!
They CAN guarantee that they will be able to do something, although they cannot guarantee a specific result (ie. deliver the asset protection guaranteed by the agreement, but cannot guarantee that you will get back “$1000 or more in tax refunds.) In terms of loan modification, I believe they can guarantee that you will get a modification, but not that you will save “X” on your mortgage every month.
How does a loan modification work specifically for me. I fell behind due to the escrow account. My actual mortgage payment is okay but the escrow analysis has made my payments almost unbearable. How would a loan modification work when the escrow needs to be adjusted?
Dear Cheryl,
There’s a couple options you might consider. It might not be called an actual Loan Modification, but it will accomplish the same goal… keeping you in your house with a payment you can afford. The first solution I’d investigate is asking your lender to take the escrow shortage and spread it out over a longer period of time. Consider this:
Let’s say your escrow shortage is $3,000 and your lender has you paying it back over 12 months; that’s $250 extra each month on top of your regular payment… ouch. But if you can spread that same $3,000 out over 24 month the extra amount is only $125/month. Get the lender to agree to 36 months and you’ll only have to come up with an extra $83.33 each month. Now that might be more reasonable.
The next option is if you can afford your monthly payments just because of the escrow shortage, you might qualify for an HSA (HomeSavers Advance). This is a one-time loan being offered by Fannie Mae that can be used to cure delinquencies or arrearages of principal, interest, taxes, and insurance (PITI). A HomeSaver advance loan can be up to $15,000 and will mean you have to sign a promissory note, but it’s not going to accrue interest or require payments for the first 6 months, it’s payable over 15 years, and bears a fixed interest rate of 5%.
Hope this helps,
Ralph R. Roberts
We filed Chapter 7 after having a 50% reduction in income after 23 years in business in 07 and early 08. We tried getting a modifcation but our bank told us they had no options since our Option Loan was sold to a trust. The bank said their was no one person to go to to get approval.
We filed Chapter 7 to buy time and try and save the house while we continued to work. We have been trying to keep the cars, health insurance and the house. We are now 60 days late on our pay option arm. The home is upside down by 35% on a Jumbo Option Arm. We have money coming in just not enough fast enough to get ahead. Our track record is outstanding and our credit was 700+ before this happened.
Question: I read based on FDIC and Bank Of America Modification program is not possible if someone filed Chapter 7.
Could we offer to reaffirm?
Maybe a trail period of on time payments at the modified amount?
Any Wisdom?
They did offer taking the missed payments and divinging them up by three months but we would surley fail on that since we have missed the payment we have.
I am confident we will pull out of this.
HELLO I AM WRITING YOU TO SEE IF THE COMPANY THAT I WONT TO DO MY LOAN MODIFICATION IS A GOOD LAW FRIM TO TO THIS WITH.MY MORTGAGE COMPANY IS NOT TRING TO HELP ME WITH THIS ISSUSE BUT THEY ARE TELLING ME TO WATCH OUT FOR OTHER COMPANY THAT IS WILLING TO HELP.SO I WONT SOMEONE WHO KNOWS MORE ABOUT HOW THIS WORK TO HELP ME KEEP MY HOME.THANKS MY E-MAIL IS cheryl.warren@ymail.com
Dear Pam,
The interaction between loan modification and bankruptcy can be very tricky. Whenever there is a bankruptcy involved it always complicates things. Lenders do not want to be viewed as having violated the debtor’s automatic stay. Lenders also don’t want to be seen as violating the debtors discharge once one is received. These are just two of the additional concerns imposed by a bankruptcy. That does not mean that a loan modification is not possible if there’s a bankruptcy, it just means there’s more steps to take and more “I”s to dot and “T”s to cross. For that reason alone, many lenders are reluctant to even address the topic, Bank of America would be no different. Times are changing though, and more lenders are beginning to explore loan modification’s inside a bankruptcy.
You’re correct that the current FDIC program does impose a bankruptcy restriction. A homeowner does not qualify for the FDIC program if they are in an active bankruptcy or have received a discharge from a Ch. 7 bankruptcy since the origination of the loan for which the loan modification is being sought. There are other restrictions such as the house must be owner occupied and the primary residence, the loan must be 60 days or more delinquent, the foreclosure sale can’t have taken place or be scheduled in the next 60 days (most states), the loan must be the first loan, and there can’t have been a loan modification within the last 6 months.
You have to remember that lenders have rules (guidelines) to follow when they are considering a loan modification. If the loan modification doesn’t save the lender more money than the cost of foreclosure, they’re not typically interested in modifying the loan. Part of the lenders decision making takes into account whom the Investor is on the loan. When there is a mortgage backed security pool holding the note or a trust, it can be more difficult and costly to modify the loan. The lender/servicer can approach the Trustee or the Portfolio Manager about the idea of modifying the loan, but again if it’s more expensive to modify than to foreclose, the answer is often times foreclose.
I can’t advise you on whether it makes sense for you to reaffirm the loan. You really need to speak to the attorney who filed your BK petition. If you filed pro per, meaning you filed for yourself without a lawyer, you need to seek out the advice of one now. The decision to reaffirm or not is often very petitioner specific. I have heard of cases where debtors have agreed to reaffirm on the condition that the creditor/lender modify the terms of the loan. The situation you described seems to make you a good candidate for some workout (home retention) solution. It might not be a loan modification, but as you suggested it might be a trial period, or a more extended repayment period. Since the offer to allow you to repay the delinquency is already on the table, maybe you start there. I know you said that 3 months would make the payment too steep and only cause you to fail, but what about 6 months or 1 year? Remember that there are new rules that govern this process, you may need the Ch. 7 Trustee to sign off on your negotiations and you may need court approval to make the lender comfortable that they’re not violating any of the bankruptcy rules. My advice would be that you approach the issue with your attorney first. Maybe a contact from him or her would be better received by the creditor’s attorney than a call from you.
I’d be very interested in hearing how this all turns out and what obstacles you’ll have to overcome to achieve your goal of keeping your home. This is a very fast changing area, it may be that something you do within the process can help others save their homes too. Please keep me updated with your progress.
I hope this helps,
Ralph R. Roberts
I lost my job a few months back; due to a workforce reduction, and plan to apply for the home loan modification immediately to limit affecting my credit score and avoid possible foreclosure. I am currently up to date on my mortgage payments; but cannot make any further payments, since my only income is currently unemployment benefits. I recently interviewed for a job that would require a significant salary reduction, and relocation out of state. Should I be offered the position; how will this affect my loan modification request, considering I must relocate and the change of my income status? I do not want to sell my home; considering the recent reduction in home values, and my concern that the new position may be temporary since it is dependent upon sales revenue within the current economic crisis. Should I delay submitting my home loan modification application until I know if I am offered the position? Otherwise; should I be offered the position, do I resubmit a revised / new application to reflect changes in my status? Should I consider negotiating a delayed start / relocation date with new employer until home loan modification application is approved, or would it be necessary to delay until contract for the home loan modification is actually signed? Will accepting an offer for the position; if the start / relocation date can be delayed with new employer, affect my status for approval of the home loan modification? I think you can see the dilemma I am facing. Although I would be employed; the reduction in salary and additional expenses for relocation housing, may inevitably result in foreclosure anyways, should I not qualify for or receive the home loan modification. Can you provide me with some guidance as to what would be my best option to consider under these circumstances?
Hi Ralph:
You should provide an example, for your readers, on a case and how you would calculated the figures for DTI, given in your example, to potentially be viable for a Fannie Mae Modification. Of course the readers would have to understand that the example is assuming the loan was a fannie Mae loan originally as the institutionalo investor.
Thanks,
Stan
I have heard that you need to be behind in your mortgage payment in order to get a loan modification. Is that true? Also I spoke to a mortgage broker who said I should instead apply for the 0 percent credit cards and do that instead. Does that make sense?
Deb
Hi there, just trying to find out what is 0 percent credit card. How do you apply for that rather than going through with the loan modification? I have alot of credit card bills and various secured loans. I have been making my payments on time with my mortgage lender and never missed a payment, but due to all my credit card bills going higher in interest rate its hard for me now for my mortgage payments. I havent miss a payment yet. I have a friend helping me out. Thank you very much for any information that you have. Pls advise. Thank you