Loan Modifications are becoming more and more common in California due to the severe real estate recession, rising unemployment, and political pressure being applied to mortgage banks to seek loan workouts instead of foreclosure. We are often asked what are the basic guidelines that mortgage banks look at in order to determine if a homeowner should be granted a Loan Modification.
There are three basic criteria that mortgage banks use, which are; a valid hardship, financial duress which has caused, or soon to cause delinquency on the mortgage payments, and a debt to income ratio within certain guidelines. This article will focus on the 3rd criteria of debt to income ratio guidelines.
Although the actual debt to income ratio criteria will vary from one bank to another, most all banks view this important ratio in a similar fashion. First of all, the definition. Mortgage Banks want to know a homeowners total debt which includes; mortgage payment (whether being paid or not), property taxes, insurance, utilities, telephone, groceries, auto payments, auto gas, eating out, entertainment, clothes, child support, education, etc. The income is simply the total family income after taxes if you are W-2 employed. The debt to Income (DTI) ratio is simply the total debt divided by the total family income. Most mortgage banks want this ratio to be between 60% to 95%, prior to the loan modification being granted.
The logic of this ratio is as follows. If a homeowners DTI is higher then 95%, then from the Banks point of view, even a loan modification is granted, there is a high probability that the modification will not be enough to prevent the homeowner from being delinquent in the near or mid term future, in most cases. So they will usually decline a Loan Modification request if this ratio is to low, and suggest a Short Sale instead. On the other hand, if a California homeowners debt to income ratio is lower then 65% or so, then the Bank has an entirely different point of view, which is “Why is the homeowner asking for a Loan Modification in the first place ?” From the Banks perspective, if there DTI ratio is this low, the homeowner should be able to keep up with their loan payments without a Loan Modification.
There is another ratio that the mortgage banks look to achieve after a loan modification is completed. Most mortgage banks would like to see the homeowners Mortgage Debt to Income ratio be about 38% after the loan modification is completed. Note, this the just the mortgage debt, not the homeowners entire debt as defined above. This final ratio assures the mortgage Banks that there is a high probability that the homeowner will be able to keep up with the mortgage payments under the current financial duress, and thus prevent future foreclosure. For questions, visit our loan modification affiliates website, Ca Loan Mod Lawyer, or call them at: 1-888-530-1212.
Short Sale Information,