If you want to know how to qualify for a loan modification, one of the key factors for success is the front-end debt-to-income (DTI). Getting to grips with this concept and how it’s relevant to your individual situation gives your loan modification application a far greater chance of achieving a positive result.
How To Qualify For Loan Modification – DTI
- When your lender is assessing your loan for a loan modification qualification, they look at some important ratios in deciding whether or not to approve or reject your loan modification package.
- To get loan modification help, you must understand these ratios because the lender uses them to determine your target mortgage payment post modification, which represents a portion of your gross income.
- If a loan modification is feasible and your lender approves it, they need to see solid proof of the fact that you can realistically afford your new loan payment.
- On the other hand, if your new mortgage payment is not manageable based on the applicable DTI (whether it’s 31% or 42%), this will significantly influence your chances of approval.
Front-end Debt-to-Income (DTI)
- Based on President Obama’s anti-foreclosure strategy called the HAMP program, it is stated that in order to be eligible for HAMP, the lender needs to conduct income documentation, otherwise known as income validation. Your lender needs to make sure that your monthly mortgage payment (PITIA) ratio is more than 31 percent of your gross income prior to the modification. This means that your DTI is 31%. To determine this ration, divide your house payment (PITIA) by your gross income. PITIA stands for principal, interest, taxes, insurance, and association dues if applicable.
- This ratio is known as the Front-end Debt-to-Income (DTI). If it is below 31%, then you are not considered eligible due to the fact that an argument for financial hardship cannot be effectively made.
- How is your house mortgage payment or PITIA defined? It is made up of principal, interest, taxes, insurance, and association dues. PITIA does not include loan payments on 2nd or 3rd liens.
- How is front-end debt-to-income defined in the framework of loan modification? It is the monthly loan payment divided by your monthly gross income. In other words, it is your PITIA divided by your gross income. These concepts may seem a little intimidating to you if you are not familiar with the mortgage and home loan modification industries, but understanding them is not that hard with a little bit of time.
What qualifies as an affordable mortgage payment with HAMP?
There is also a clause in the HAMP documentation stating that an affordable house payment after the modification process must not be more than 31% of your front-end DTI. What this means is that the loan payment, made up of the principal, taxes, insurance, and association fees (PITIA) on the original mortgage must not exceed 31% of the household’s gross monthly earnings. Based on HAMP, if other liens exist against the residential property (a home equity line of credit or a 2nd mortgage, for instance), they are factored in individually as a part of the back-end DTI.
Recommended Front-End Debt-to-Income For HAMP & Private Mortgage Modifications
- For HAMP – the front-end DTI ratio ought to be at 31% once the modification process has been finalized.
- For Private Loan Modifications – In the case of private loan modifications, there is flexibility for this ratio to change at the lender’s discretion. The applicable range in these situations is 25%-42%.
Considering Back-End Debt-to-Income
- The back-end DTI is arrived at based on the total of all monthly expenditures related to debts.
- The recommended back-end DTI is worked out by utilizing your newly modified loan payment (the combination of principal and interest) after your mortgage modification has been finalized, along with all of your pre-existing monthly debts.
- If you qualify for a loan modification according to the HAMP parameters, but your back-end DTI after the modification exceeds or is equal to 55 percent, you will be sent a letter saying that you need to talk with a counseling service that is HUD-approved (Housing and Urban Development).
- Also, your modification will not take effect unless you sign a statement confirming your agreement to seek financial and/or debt counseling.
The Importance of Debt-to-Income Ratios
A mortgage modification approval process is very much based on financial qualification. Your lender utilizes DTI ratios as decision-making tools (or indicators) to assess your ability to fulfill your debt obligations. These ratios must be within defined limits in order to avoid the possibility of default, and to ensure that you are not over-extended by your financial commitments. Due to the fact that these ratios play such a crucial part in the loan modification approval process, it’s worth understanding them and in the process being more empowered to take financial paths that benefit you and your family.
Introducing the MyCaal loan modification software – Accurate knowledge of your pre-qualification status prior to submitting your application is an area in which MyCaal.com becomes an empowering tool, in that it is able to provide the homeowner with an accurate synopsis of their pre-qualification status, before the loan modification application is ever submitted. This means that the application can be submitted with a great deal more confidence and peace of mind, as well as giving the applicant a greater degree of certainty when negotiating and discussing terms and conditions with their lender. A realistic foreknowledge of pre-qualification is a game-changer in the realm of mortgage modifications. It is simply the best way to know if you qualify for loan modification.
Superior and unbiased advice – Additionally, should you not qualify for a modification of your loan right away, Mycaal.com loan modification software advises you of the most appropriate steps that you ought to take in order to enhance your chances of having your application meet with a positive outcome.
For more clarity on how to reach your target DTI and qualify for a loan modification, kindly visit http://www.mycaal.com/.