Mortgage Modification: 15 Million Homeowners Qualify in 2009!
Initially, lenders strictly adhered to the seven guidelines explained below when awarding mortgage modifications.
Today that’s no longer true. They’re now limiting their analysis to fewer of the original criteria as the crisis deepens and the workload increases. In fact, the range is surprising and somewhat inconsistent. This indicates to me that the rules are being written “on the fly”.
Virtually all lenders are using “cascading calculations”, whereby one set of calculation results are used in the subsequent calculation. Therefore, no one criterion is final; rather, qualification depends on a combination of factors.
1. Ability to pay: This is your ability to meet the obligations of the modified loan. Customary underwriting criteria are used, so take 55% of your gross monthly household income. That is a rough estimate of how much monthly debt payment the lender will allow. This is your target amount after modification.
Debt to Income Ratio is the term that lenders use to describe this underwriting guideline. It’s simply your total monthly debt payments, including cars, credit cards, student loans, and others, divided by your Gross Monthly Household Income.
Lenders quickly approve modifications if the resulting (AFTER mod) DTI will be in the 35-65% range. Starting late in 2008, though, my customers got mods with DTI’s as high as 79%.
2. Type of Loan: 100% of Negative Amortizing Adjustable-Rate Mortgages (NegAM) loans will be approved for modification to fixed rate loans. Almost no fixed rate loans with rates lower than 6.0% will be modified. Everything in between is fair game.
3. Hardship: Six hardships are commonly accepted:
- Divorce or separation
- Loss of income
- Reduction in income
- Death of spouse/co-borrower/family member
- Illness
- Military service.
Let’s face it, with the economic downturn there are literally millions of Americans whose ability to meet monthly payments has diminished. So there’s no shortage of hardship. The lender simply needs to know personally and specifically what your hardship is.
Obviously, if nothing has changed in your ability to make the payments (such as a fixed-rate loan and no income decline) then the lender will be reluctant to modify the loan. It’s clearly stated in FHFA and other modification guidelines that borrowers who default on their payments without a hardship – simply to qualify for a modification – are ineligible.
4. Occupant: Owner-occupied homes are the easiest. However, even HELOC loans on investment properties are being modified.
5. Default status: The FDIC Guidelines are that the borrower must not have filed bankruptcy during the life of the loan and a foreclosure sale must not be “imminent”. The Guides also state that borrowers should be encouraged to apply even if they’re not late on payments.
In reality, applications from borrowers who are current on their loans aren’t getting good modification offers…even with all the announcements to the contrary.
6. Age of loan: You can expect that any loan older than 9 months will be considered for a modification.
7. Balance Sheet Strength: Whether you have significant additional assets beyond the property may be an issue, especially if the loan was a refinance with equity taken out or is a Home Equity Line of Credit (HELOC).
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