Ryan Rockwood: All right. Take two. This is the Loan Modification Insider Secrets Teleconference. Thanks for bearing with us, folks. That’s all I’ll say. We don’t need to go with the announcements again.
Mike Rockwood: You know what thought? We’re here to beat the bank. And did you know that we’re not lawyers or tax accountants?
Ryan Rockwood: Say that. Yes.
Mike Rockwood: So, don’t take what we say as legal advice or tax advice. We’re just…
Ryan Rockwood: Yes. Go ahead. Tonight’s topic is DTI. And let’s get right back in here.
Mike Rockwood: So, we’re talking about debt-to-income ratio. And Ryan and I were just talking, before we had to rerecord everything, about the fact that a lot of people confused – get confused with the terms. Because heck, an awful lot of people just don’t like financial terms, whatsoever and really never did like math. But then also a lot of people haven’t really come to realize how important this calculation is. It’s absolutely central. It’s critical as to whether or not you will get approved for a loan modification.
Now, let’s first make a couple of definitions. First of all, the underwriter. I refer to an underwriter sometimes. Let’s just take a minute and talk about who that person is. That’s the person at the bank who is responsible for underwriting the loan. That is a process – an auditing process or a legal review process by which they validate all of the items upon which they are committing their bank to accept. So in a loan, when you go to apply for a loan, it’s underwritten. In other words, somebody takes a look at the verification of the appraisal, verification of your income, verification of your employment, et cetera, et cetera, et cetera. So, that is the underwriter and he is the one or she is the one who is going to review your documents and determine if the right debt-to-income ratio has been calculated and, in fact, if you qualify.
So, that’s – and then another definition is ratio. Don’t let debt-to-income ratio intimidate you. It’s just another word for percentage. And you’re all familiar with percentage, you know, like batting averages.
Ryan Rockwood: That is more…
Mike Rockwood: Less intimidating.
Ryan Rockwood: Yes.
Mike Rockwood: It is more common. Yes. So, it’s the same thing as percentage. And the question then is how much – what percentage of your gross household income do you have to spend on that first mortgage. Government guidelines, which have become industry guidelines now standard is 31%. So, they’re saying if you have to spend more than 31% of your gross household income, it’s too much and you qualify for loan modification. That’s very simple.
And so your debt-to-income ratio really is used in two different ways in analyzing your qualifications for a loan modification. First is I just talked about is the percent that your mortgage payment is of your household income. That’s called the front-end debt-to-income ratio.
Ryan Rockwood: Why is it called front-end?
Mike Rockwood: Who knows? But it’s the first mortgage payment –Principal, Interest, Tax, Insurance, and Homeowners Association dues, if any. Add all that up and divide it by your gross household income. If that’s less than 31%, you’re totally toasted and screwed. And if it’s more than 70%, you’re absolutely screwed.
Ryan Rockwood: Well, the second one you’re really screwed. First one, you’re actually in great shape for life.
Mike Rockwood: Yes. You have good income.
Ryan Rockwood: Yes. Your ratio is bad.
Mike Rockwood: You can’t get a loan mod.
Ryan Rockwood: Yes. Real bad loan mod situation.
Mike Rockwood: And then I want to talk to you about back-end debt-to-income ratio. And that is where you add not only the second mortgage, but you add your car loan and your student loan and your credit card debt and your boat and your plane and all the other things that you have debts on.
Ryan Rockwood: Your plane. Everyone on this call probably has a plane or two. At least a time share on a plane.
Mike Rockwood: So, you add all that in there then divide it by your gross household income. And that’s your back-end debt-to-income ratio. And if that’s over 70%, think about it. If 70% of your household income is enough [phonetic] just by paying debt, you are going to have a hard time buying groceries, paying your utility bills, paying for the kids’ tuition, putting gas in the car, insuring the car, paying for life insurance, paying for medical insurance, et cetera, et cetera, et cetera, much less giving any money to the temple, to your church, or your mosque.
So, that’s your guide for your back-end debt-to-income ratio. If it’s over 70%, you’re really in trouble. So, you really need to have a front-end debt-to-income ratio of over 31% and a back-end debt-to-income ratio under 70%. And if you’re in there, and most people are, you’re in great shape.
Now, it happens at least half the time that we have to help people torture their numbers until they confess to the right debt-to-income ratio. And the way that we do that is by getting them to very carefully analyze, first of all, their income, the two factors, the denominator and the numerator. The way that we do that is we get them to, first of all, look at their income, their gross household income. First of all, is the figure that you’re using only for the people on the loan? It should be. Any other additional income from spouse, from kids, from any other source, except income that is that of the – for people on the loan – is entirely at your discretion as to whether or not you could reveal any other income.
Secondly, with regards to your income, you have to calculate it correctly. And this may sound like a real insult to your intelligence. But much more than half the time people have calculated their income incorrectly. Remember, all these calculations are made off of your gross income. And your gross, you have to be sure that you’re calculating your income correctly, because the underwriter will. Count the number of paychecks you’re going to get. Is it 26 or is 24 in a year? So, multiply your gross income on one check by the right number and then divide it by 12 to get your monthly.
And then if you are a 1099 employee or if you earn cash through tips or something like that, then you’re going to have to demonstrate your last 90 days or so of income. And the beauty of being self-employed or cash employed is that you can kind of pick and choose the period of time as long as it’s in the recent past when the income is about exactly what you want it to be to get the right ratios. So, in other words if you haven’t had any income in the last month but in the last 90 days you have had $21,000 worth of income, then you can take the last 90 days and say that your monthly income is $7,000, right? So, it gives you some added flexibility.
And then flipping over from the denominator to the numerator. With regards to your household payment, be sure that it includes principal, interest, tax, insurance, and any homeowners association dues if there are any such dues. So, you really have to scrub those numbers, make sure they’re right. And then if they fit, if you fit, then you are going to qualify for a loan modification. And here’s how I always counsel people. That’s the good news. You qualify. Your ratios are right.
Now, let’s put together a good application. Let’s be in default by several months so that we actually get an offer. So, then we roll up our sleeves and make a good application. But until you know if those ratios are right, you really don’t know if you’re going to qualify, all right? Is that pretty clear?
Ryan Rockwood: I think so.
Mike Rockwood: All right, good.
Ryan Rockwood: All right. What do you got? Anything else? That’s the main message for today, right?
Mike Rockwood: Well, yes.
Ryan Rockwood: That’s us teaching.
Mike Rockwood: In the workbook, which everybody has, I’m sure this page will be familiar to you. I guess we don’t get real good clarity there but take a look at that example in the book and in that article that came with the book about DTI. It gives you some real good illustrations and shows real clearly which are the factors, how to calculate it, et cetera. All right, you can send questions to us at…
Ryan Rockwood: Help.
Mike Rockwood: At help@60minuteloanmodification.com. And we did get some questions ahead of time, right? And so I’ve got some questions I can start with, Ryan, if you want me to do that.
Ryan Rockwood: Yes, well let’s see if anyone did call in. Just have pity on those poor folks.
Mike Rockwood: All right, we always like to give respect.
Ryan Rockwood: Hello there, callers. Hi, how are you doing? Anyone have a question tonight? Anyone have a question tonight on the phone? All right, your loss, guys. Shoot us an e-mail this week. Thanks for listening. All right, no callers. So, let’s go to the e-mail questions we had before the call.
Mike Rockwood: All right, James writes in and says, “Is there no way for me to qualify for a modification? My mortgage payment is only 23% of our household income.” He says he’s listening on the call now. Okay, James, here’s the deal. Like I just went through and explain to you, if your mortgage payment, first mortgage with principal, interest, tax, and insurance, and homeowners association, add all that up. If that is only 23% of your household income, you’re not going to qualify. There is no chance you’re going to qualify.
Now listen, you say our household income. So, let’s be sure that you heard what I said about torturing those numbers. Make sure that the income that you’re talking about, the denominator that you’re using is only for people who are on the loan. Make sure that you’re not including your wife if she’s not on the loan. Make sure that you’re not including your income if you ain’t on the loan.
So, check that out and then make sure that you fully loaded that numerator with principal, interest, tax, and insurance. So torture, torture it. But James, there just is no way. And here’s kind of the shame of one thing that I’ve seen happen a lot is a lot of lenders will accept a loan modification application and they’ll tell you that even though you don’t meet the Making Homes Affordable Modification guidelines, that you’re still be considered, and it’s just baloney.
A lot of times, it’s just a ploy to keep you from going into default or to begin a repayment plan. So they’ll say, “Yes, yes. We’re going to consider you for it. But in order to qualify, you have to get started right away on this repayment plan. You have to give us 50% of the arrears and a larger than usual payment for three months while we accept –while we investigate whether or not you qualify.” Well, don’t believe it because you don’t.
Ryan Rockwood: And that’s all fine and dandy to have them consider you if you don’t as long as your not paying for that privilege, right?
Mike Rockwood: Right.
Ryan Rockwood: So you know what I mean. And a lot people call like, “Oh, I’m so frustrated. They’ve been considering me forever.” And we say well, are you paying? And they say no and then you kind of, “Well, what is the problem exactly?” The problem is just that emotional stress, you know. But that’s a better problem to have than the other problem, which is…
Mike Rockwood: Yes, if you got duped into paying during that time, then that’s a rip off. And honestly, they’ll keep people hanging on for months. And I’ll have to break the news to them because they’ll get together with me on the phone and they’ll say, “Listen. What’s the deal here? I just can’t seem to get approved.” And I say, “You’re never going to get approved. It’s a sham.”
So anyways, Ted writes in and says, “My bank says they use net income to figure my DTI and you say it’s gross income. Which is it?” Well, Ted, you know what I mean? If your bank says that they use net income, then they use net income but then their ratios will be different, I mean, the guidelines will be different. Because if they use net income, in other words if the denominator is 10% smaller, then you’re going to expect the outcome to be 10% higher or so. I’m not that good in math. But at any rate, they’re going to have different guidelines than 31%. The 31% comes from the Making Homes Affordable Program, the government guidelines that were given to lenders some time ago, some 15 months ago.
Ryan Rockwood: You know we had – sorry, are you done with that point?
Mike Rockwood: No.
Ryan Rockwood: Okay, go ahead.
Mike Rockwood: And so those are guidelines that were crafted by the government in cooperation with the industry, and they’ve become the de facto standards. So, it makes no difference. If they say it’s net income, then it is net income and just ask them what is the threshold that you have to hit in order to qualify for the modification based on net income figure. You see what I mean, Ted? So, it’s just going to be a different figure but they’re going to have different guidelines. Don’t let them get away with telling you that they use net income figure and your target is 31% in order to qualify for the Making Homes Affordable. That’s just wrong. And you know. Maybe I haven’t repeated lately how we deal with wrong information because you do get wrong information from these people frequently.
And here’s my recommendation. Here’s what I do when I get wrong information. I thank them very politely and hang up and call back half hour later. And then I’ll call back half hour later. And I’ll do that five times until – because every time you call in, you’re going to get a different loss mitigation officer and they’re going to calculate it differently. And some of these people have really, really bad training, little training. They’re just slammed on the phones and told to kind of pacify as many people as they can, work as much as they can, get as far into the situation as they can, but then pass it on to a more senior person.
So, some of them try to do more than they’re qualified to do, and so they’ll just give you junk for information. And it’s kind of senseless to argue with them because they get embarrassed and they don’t want to call the supervisor over and explain to them that they just told you something that’s really dumb. So, that’s my process is I’ll call back five times. And if I still can’t get wrong information corrected, then I’ll ask for a supervisor.
And that sounds good but it isn’t usually that productive because number one, supervisors sometimes don’t take your calls because they say they’re too busy. Sometimes that’s what they do. Number two, they won’t return your call because they’re too busy. And number three, very often they’re reticent to contradict what their agent, who they trained, just told you. And number four, I think sometimes they just hand the phone to one another and say, “Here, you be the manager.” So, it’s not a manager at all and it’s nobody with any more training.
So you got a lot working against you and you might just have to go right on to a QWR, which really I’m amazed at how responsive banks are to qualified written requests. So, use that when you’re just getting wrong information and you can’t seem to get somebody to give you the right answer. Use the qualified written request, and I know I’ve talked a lot about how to make that happen.
Marla wrote in and said, “My husband and I want to keep arguing with Aquin [phonetic].” God less you Marla. “About how they calculated our income. They say that our income from rentals, we have two rentals, makes us ineligible for Making Homes Affordable on our primary.” So, I think Marla what you’re saying is they say that you r income is too high and your debt-to-income ratio then is probably too low. “This does not seem fair.” Marla says, “How can we get them to consider us?”
Marla, they are making a mistake and the way that I prevent this mistake from being made is that I almost never include rental income in a personal budget. I always separate it on a schedule of Real Estate Owned, specifically because I was, for many, many months, frustrated as could be that people were – or that banks and servicers were mistakenly including rental income in their income to qualify or disqualify people from Making Homes Affordable.
So, you’re in a predicament that I have been in probably at least 10 times. And the only way I recommend you – it sounds bizarre but you got to kind of start over – I would tell them you need to update your financing and then give them a completely new set of finances. So, your income is going to drop dramatically. And if they even ask you why that is, just explain that you’ve come to understand that you should have reported that income on your schedule of your real estate owned.
And see then, what you do Marla is you take the income from the rentals and you subtract from it the PITI, or first of all you subtract from a 25% for maintenance and vacancy and management fees. They’ll do it if you don’t, so you might as well. Then subtract the principal, interest, tax, and insurance, and all the mortgages and then you have probably a pretty negative number. Take that negative number over to your budget as an expense item or if you do happen to have some positive cash flow from these rentals, take that over as a really small addition to your income. So, in that way, you – I mean, it seems simple enough. Why can’t they do that? Who knows why they can’t but they can’t. So, that’s the way to handle it, Marla.
Tracey writes in and says, “Does it matter that I am now on unemployment?” I mean, our DTI is 47%. Will we get refused because my income is too low now?” Tracey, that doesn’t seem like a show stopper to me at all. First of all, unemployment compensation is acceptable as income, of course. And by the way, when you document that as income, include the award letter along with copies of the checks. It’s best.
And then she says that her debt-to-income ratio, because her income is down, her debt-to-income ratio is going to climb, right? And it’s 47%. Now, Tracey, if you say that’s 47% front-end DTI, that is high. But when you add your car loan, students loans, credit cards, et cetera, you still can’t go over 70%. So, if that’s the case, you’re still right on track and it’s not going to interrupt your loan modification at all. You’re still a very good candidate.
Ryan Rockwood: Okay, you know we had a guy call in today or leave us a message or whatever with a lot of confusion about net and gross income. And maybe we could go over that because maybe he’s watching. Anyway, it can be complicated.
Mike Rockwood: Yes. It’s not as simple as it sounds.
Ryan Rockwood: But it’s not over – and you can’t overcomplicate it either. You know what I mean? It is – there is [Indiscernible]. First of all gross income is, for many people, unchangeable, right? I mean, gross income is gross income if you’re a W2 employee. That’s just the way it goes.
Mike Rockwood: We never argue about that.
Ryan Rockwood: Right. And the only reason nowadays that you never really have to worry about net, usually is that – you know, you’re going to balance your budget at the end of the month for your loan modification. You wanted to hit zero, your cash flow to hit zero. And so, I mean, net might have an important – because obviously it’s the first 10% of your paycheck gone, eliminated, right? And the rest of it, the process about chewing that up. What do you think his questions could have been and what are…
Mike Rockwood: Two things really screw people up with regard to net. Well, number one, is they think that net is what they net or what they get in net pay every month and that’s not good to use. It’s not smart. Because the underwriter is going to go – well, wait a minute your Flex Medical is taken out of there. Your medical benefits, your eye care benefits, your health care benefits, your family stuff, your social security, your pension, your taxes. All these things are taken out of there, number one.
Ryan Rockwood: And that’s all fine and dandy. But a lot of it you get back.
Mike Rockwood: Right, exactly. So, they’re going to say well…
Ryan Rockwood: Your tax return shows a return of 10 grand, so you’re going to have to factor that back through your paycheck.
Mike Rockwood: Yes, so the way to do it – and there’s another caveat. Most people think they pay more taxes than they actually do because they have withheld quite a bit more than they end up paying. So, what the underwriter wants to do is go back to your tax forms and look at line 60 and divide line 60 by line 1, so he knows the percent of your income that you pay in taxes and he wants to apply that to your gross income and that’s what you should do.
So, you should deduct about 5% to 15% from your gross income and show that as your net income, and then put all those other expenses – your 401k savings, your medical, dental, payments, all that. Put that into your expenses under your debts in your costs of living. I’m glad you brought that up actually because he was clearly confused and I guess it can be kind of confusing. But that’s the way you should handle it because that’s the way the underwriter is going to handle it and you want to be on the same wavelength so that you know what you’re submitting is analyzed in the same way that they’re going to analyze it.
Ryan Rockwood: All right, well that’s it. Let’s wrap it up.
Mike Rockwood: I got another one. Well, I got one more. I got this one from Adam. Are we out of time already because I’ve still got questions?
Ryan Rockwood: Well, we can do another one.
Mike Rockwood: Okay. Adam says, “My girlfriend has a different mailing address, but it’s giving me a contribution letter to get my income up enough to qualify like you said. But she thinks the fact that her mailing address is different will make it invalid. Will it?” Adam, I think your girlfriend is trying to convince you that she should move in with you and that’s really not an appropriate subject for this call.
Ryan Rockwood: This is a family show.
Mike Rockwood: Yes. Now, this is a family show. We got family values here, Adam. But all joking aside, you are right, your girlfriend’s wrong. The fact that it is a different mailing address – you know I have heard of that actually being a problem. But we’ve always been able to overcome it. But here’s how I always recommend that you – this is kind of overkill but this is what I recommend at contribution letters these days because sometimes we do get that kind of flak.
The way that you handle it is send in a contribution letter. Drive down to a local notary, you know, at a real estate office or mail boxes, et cetera, or something. Get it – there aren’t mail boxes, et cetera anymore. It’s UPS store. Get it notarized and then attach to it her wherewithal. I don’t mean undergarments. Again, this is a family show. I mean her wherewithal in terms of where she’s going to get this money. Does she have a good job or a big savings account? So, I always staple that to it.
So, there’s really no question. I mean, this is a statement from somebody who has enough money, a notarized statement from that person that they’re going to give you money. So, it’s pretty hard to argue with that, so the underwriter will accept that. So, that’s what you should do, Adam. And don’t worry about the fact that she has a different mailing address. And then do start to talk with her though, about moving in, would you? Because you guys got to be clear on that.
Ryan Rockwood: All right. Let’s wrap it up.
Mike Rockwood: All right, good.
Ryan Rockwood: Thank you everyone so much for joining us tonight. Go ahead and be sure to express your interest in settling credit card debt do-it-yourself, not a program that we – in that one of the millions of lien programs out there that you’ll hear advertised on the radio constantly but a do-it-yourself simple way to do it. You can express interest in that by clicking on the e-mail in – the link in your e-mail that I sent you today and that will tag your contact in our database as being interested and we’ll send you an e-mail about it when it comes out.
Mike Rockwood: Hey, Ryan. We should also mention. I don’t know if you folks notice or if you care or if you paid that much attention to it but I’m fanatic on this stuff. So, I noticed that yesterday the Senate approved a bill that actually made it illegal to pay Yield Spread Premiums, YSPs. Those are the payments that mortgage companies or the banks use to pay to mortgage brokers when they sold you a mortgage that was a higher interest rate than you could have qualified for.
That’s right. Maybe most of you are horrified right now to learn that that was the case. But they actually were incentivized. They were paid thousands of dollars to convince you to accept a product that was higher priced than one you could have qualified for, totally whacky unethical. But it was perfectly legal until yesterday. Now, it is no longer legal, so good to see that some of these loopholes are being closed. And in fact you do want to check, on your closing settlement statement, look for that term YSP. I forget what line item it’s on but it’s in the HUD1 settlement statement.
And if a YSP was paid, then in fact you bought a mortgage at a higher interest rate than you could have qualified for and your broker got paid for it and you should probably look a little further because it’s probably likely that there are some other predatory lending practices that were perpetrated on your personhood.
Ryan Rockwood: All right, we’re also building a form for folks who have negotiated a settlement with their HELOC and/or second mortgage. So, if you’ve done that – just this week we’re talking to one guy who very casually wound up with a settlement of less than 10% on a second mortgage. And you know, the key is just figuring out. You know, we’re going to try to kind of document when is this possible with – are some lenders easier than others? Do obviously, you know, recourse versus non-recourse is going to be an issue?
Mike Rockwood: And whether or not the loan has been sold a number of times since it was made.
Ryan Rockwood: So, I think that will be important because they will have less ability to provide the original documentation.
Mike Rockwood: Well, no. Like some of the sub-primes, like when Franklin went out and when New Century [phonetic] went out.
Ryan Rockwood: They got a big discount already.
Mike Rockwood: Their stuff was discounted. So, if Aurora bought it for 25 cents on the dollar, they’re more likely more open to a settlement.
Ryan Rockwood: Anyway, fax those settlement letters to us and e-mail us with that information and it will be a great help to a lot of people, I think, because we share that information. Well anyway, thank you everyone for joining us tonight. It has been a great show. Hope you got a lot of good information and a lot of encouragement on your way to get your loan mod. This is Ryan Rockwood with my dad, Mike Rockwood. And we’ll see you next week.
Mike Rockwood: Goodnight.
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