Affordability is critical when attempting to qualify for a mortgage loan modification. The point of modifying your loan is to keep the home and lower the monthly payment. Before modifying the loan, the lender must analyze your income to make sure it's enough to cover the new payment. It analyzes your monthly expenses to come up with an expense-income ratio -- or debt-to-income ratio. The DTI ratio requirements vary by lender and program.
The DTI ratio is expressed as a percentage. It represents the amount of gross income you use to pay your bills each month. On a modification, lenders are concerned with your housing DTI. They take into account how much you pay in loan principal, interest, property taxes and homeowners insurance. As a rule of thumb, a housing DTI within 28 percent is ideal, but you can get away with a higher DTI on most loan modifications.
The Department of Housing and Urban Development and the Treasury Department run the Home Affordable Modification Program. The program streamlines the modification process by setting guidelines for its participating lenders. More than 100 lenders participate in the program. Before mid-2012, it required a pre-modification DTI of more than 31 percent and a post-modification DTI of 31 percent or less. Changes to the program eliminated the pre-modification DTI requirement and allow you to have a DTI between 25 percent and 42 percent after the modification.
If your loan doesn't qualify for HAMP assistance, or your lender doesn't participate, you might still be able to obtain a loan modification. For example, loans owned or guaranteed by Freddie Mac might qualify for Freddie's Standard Modification program. The modification must result in a payment that's at least 10 percent lower. The DTI cut-off is set much higher at 55 percent. Freddie notes that its DTI requirement for investment property is different. Non-HAMP loans under individual lender modification plans typically require a DTI of between 31 percent and 38 percent.
The housing DTI is calculated by using a fully amortized payment -- part principal and part interest. It also must include private mortgage insurance or government mortgage insurance, if your loan requires it. If you got your loan with a low down payment, you probably pay one or the other of those types of insurance each month. The DTI also accounts for local fees, such as homeowners' association dues, special assessments, ground rents and certain taxes, according to Realty Trac.
- Bankratec.om: How Much House Can You Buy?
- Making Home Affordable: HAMP
- Freddie Mac: Standard Modification
- Making Home Affordable.gov: Contact Your Mortgage Company
- Making Home Affordable.gov: Supplemental Directive 12-05: Making Home Affordable Program Administrative Clarifications
- Realty Trac: New Loan Mod Plan Open to Investment Property: Affordability
- 850 Audit Systems: Loan Modification Guidelines and Programs
- Stockbyte/Stockbyte/Getty Images
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- Habitability Laws for Mortgage
- Definition of Gross Income for Mortgage Calculation
- First-Time Home Buyer Qualification Requirements
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- What Is an FHA Direct Endorsement?
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