Secrets to qualify for a loan modification – DTI
In the loan modification process, your debt-to-initial income (DTI) ratio is probably one of the most important qualifying factors. Understanding this concept and how it applies to your unique circumstances can greatly increase your chances of being approved for a home loan modification. Why is this? When your bank is looking at your loan for a modification, they look at a few important indices to determine whether to approve or deny your Loan Modification Request. These ratios are important because the bank uses them to determine your new payment goal, which is based on a percentage of your gross income. If a modification is feasible and the bank agrees to modify your loan, the bank needs to see convincing evidence that you could realistically afford the new target payment. However, if a target payment is not sustainable based on the defined DTI (either 31% or 42%), this will greatly affect your chances of approval.
Initial debt to income (DTI)
Under President Obama’s foreclosure prevention plan known as the HAMP program, the statement is made that in order to qualify for a HAMP, the bank must perform income documentation, also known as income validation. The bank must confirm that the owner/borrower’s Monthly Mortgage Payment Index (PITIA) is greater than 31 percent of their gross income before the modification. This ratio is called Initial Debt to Income (DTI). If it is less than 31%, then the borrower is considered ineligible because financial hardship cannot be sufficiently substantiated. What exactly is your home mortgage payment or PITIA? It is made up of principal, interest, taxes, insurance and association debts. PITIA excludes mortgage payments on second or third liens. What exactly is an initial debt-to-income ratio in the context of loan modification? It is the monthly mortgage payment divided by the borrower’s monthly gross income. These terms may seem a bit daunting to someone who is not familiar with the home loan and mortgage modification business, but they are actually not as off-putting as they may seem once you understand the concepts involved.
What is a target affordable housing mortgage payment with HAMP?
It is further stated in the HAMP plan that a post-modification affordable housing payment must not exceed 31%-38% of the owner’s initial DTI. What this means is that the mortgage payment made up of the Principal, Taxes, Insurance and Association Fees (PITIA) of the initial mortgage loan cannot exceed 31%-38% of the family’s gross monthly income. Under Obama’s foreclosure prevention plan, if there are other liens against the home (for example, a home equity line of credit or additional mortgage), these liens are counted separately as part of the final DTI.
Suggested Initial Debt to Income for HAMP and Private Loan Modifications
- For HAMP: Per HAMP (Affordable Home Modification Program) guidelines, the initial DTI ratio should fall between 31% and 38% once the modification process is complete.
- For private loan modifications: When it comes to private mortgage modifications, there is room for this ratio to fluctuate at the discretion of the lender. The relevant range in these cases is 31%-42%.
Focusing on the back-end debt-to-income ratio
Back-end DTI is calculated based on the sum of all debt-related monthly payments. Suggested Final DTI is determined by using your recently reduced mortgage payment (the combination of principal and interest) after your loan modification is complete, plus all of your pre-existing monthly debt obligations.
Homeowners who qualify for a loan modification under the HAMP parameters, but whose final post-modification DTI is greater than or equal to 55 percent, will receive a letter indicating that they should consult with a HUD counselor. (Housing and Urban Development)–approved. In addition, the modification will not take effect unless borrowers sign a statement confirming that they agree to obtain financial and/or debt counseling.
Why are your debt-to-income ratios important?
Because a loan modification approval process is largely based on financial qualification. Lenders use DTI ratios as decision-making tools (or indicators) to determine your ability to repay your debt. These ratios must be within certain limits to avoid default risk and to ensure that the borrower does not become overburdened with expenses and debt. Because these ratios play such an important role in the loan modification approval process, it’s a good idea for you to understand them and therefore be more empowered to make informed decisions that serve you and your family well.