Hope you’ve been enjoying the series on loan modifications. This is a third in a six part series on loan modifications written by Morgan Brown at Blown Mortgage. Please be aware that I can not help you with loan modifications. You should contact your loan servicer or a local mortgage company which specializes in loan modifications if you are seeking assistance. The Arizona Mortgage Team blog has information for those who are in the Phoenixa, AZ market.

Part 3 of 6

Determining if you qualify for a loan modification

So far in this series we’ve talked about the process of loan modifications, how to get started and how to collect the information you need to accurately complete your monthly expense worksheet. The monthly expense worksheet is going to be used by your lender to determine if you qualify for a loan modification or not. Therefore this is an extremely important step that must be taken with care. Once you submit your monthly expense worksheet it becomes part of your file and is very hard to change it once submitted. Take your time and make sure it is correct!

Tip: Never lie on your monthly expense worksheet. Loan fraud is a federal crime. Knowingly submitting false information will jeopardize your modification application and may subject you to legal action from your lender.

Understanding debt to income ratio (DTI)

Debt-to-income (DTI) is the key determinant in most lending situations. In a traditional home loan the DTI plus the loan to value (LTV) play roles; but in a modification it is assumed that the LTV is negative (you are upside down on your home and unable to refinance) so the key decision factor is DTI (along with your credit worthiness as demonstrated by your monthly payment history and credit report).

DTI is calculated as follows:

Total Monthly Expenses / Total Gross Income

For example if your gross monthly income is $5,000 per month (you make $60,000 per year) and your monthly expenses are $3,000 then your DTI is:

$3,000 / $5,000 = 60%

Understanding gross monthly income

Before we can accurately calculate your DTI we need to accurately calculate your gross monthly income. Gross means the dollar amount you earn before deductions such as state and federal taxes, health insurance, 401(k) and FSA contributions.

If you are a salaried employee this is relatively easy to determine. Take your yearly salary and divide by 12. This number is your gross monthly income. If you make $60,000 per year, your gross monthly income is $5,000.

Tip: Many salaried people are paid every two weeks, not twice a month. Being paid every two weeks means you receive 26 paychecks instead of 24 (bi-monthly checks). If you take your last two paychecks and add them up before deductions you have short-changed yourself in calculating your DTI. Double-check with your employer to see if you get 26 or 24 paychecks in a year, or better, use the method described above to get your gross monthly income.

If you are paid by the hour this becomes a bit more difficult. First, you cannot count overtime pay towards your gross monthly income. Even if you’re a California-state prison guard who has been working overtime for 5 years in a row, you still have to use your base hourly income to qualify.

Take the last two-months paychecks (4) and add up the hours (except for overtime). Divide by 2. That is your average monthly hours worked. Take that hour amount and multiply it by your hourly wage. If you worked an average of 160 hours per month (40 per week) and make $20 per hour you make $3,200 per month gross income.

Tip: Including overtime is one of the biggest reasons loan modifications get rejected for hourly workers. Don’t include it in your monthly calculation. The bank won’t count it and calculating your DTI including overtime will throw off your calculation.

If you receive social security or long-term disability you may be able to “gross up” you benefits. Because social security is not taxed banks often add 25% to the value of your monthly benefit to more accurately represent the value of this money. Be sure to ask your bank if they “gross up” social security before doing the calculation with “grossed up” social security.

How to “gross up” social security:

$1,000 monthly social security benefit x 1.25 = $1,250 grossed up benefit for DTI calculation

Tip: Most banks gross up these benefits, but we always recommend asking your representative in the loss mitigation department if they gross up social security in their underwriting to ensure that you’re making an accurate calculation.

Target debt to income ratio

The target debt to income ratio that you’re looking to achieve is 50%. That means that your total monthly expenses including your mortgage comprise only half of your gross monthly income. If you make $5,000 per month ($60k/annually) your monthly expenses can’t be more than $2,500.

In reality, if you’re considering a loan modification, it is likely that your monthly debt to income ratio is closer to 100% or worse. The modification is going to help that, and we have to figure out what that will do to the ratio first.

Calculating a reduced mortgage payment

This step gives you an idea of what you’ll negotiate for when you submit your package to the bank. Use an online mortgage calculator (there’s a good one at bankrate.com: http://www.bankrate.com/brm/mortgage-calculator.asp but anyone will do) to play around with different loan modification scenarios.

Tip: Banks will typically not reduce your principal owed, and rather adjust the interest rate to reduce your payments. They will typically reduce them between 2-4%. If you qualify for the new Making Home Affordable federal modification program you may be eligible for an even greater reduction. We will talk more about that program in future posts.

Example mortgage calculation

Say you have a $165,000 mortgage that recently adjusted from 5.25% to 9.25%. Your situation would look like this:

Loan amount: $165,000

Term: 30-years

Interest rate: 5.25%

Monthly payment: $911.14

After adjustment

Loan amount: $165,000

Term: 30-years

Interest rate: 9.25%

Monthly payment: $1357.41

Lets say that you’re still making that $60,000 per year and that you had total monthly expenses (not counting your mortgage) of $1,800 per month.

Your DTI prior to adjustment:

$1,800 + $911.14 = $2,711.14 / $5,000 = 54.23%

Your DTI after adjustment:

$1,800 + $1,357.41 = $3,157.41 / $5,000 = 63.15%

Now the target DTI is 50%. Some banks vary and it’s very hard to get them to tell you exactly what they’ll accept; but industry standard is 50%. They’ll sometimes accept higher; but if you’re not near the 50% mark you’ll often not qualify for a modification.

So what can we do to get down to a 50% DTI in the above example?

Well we can request a modification of our mortgage back to the original 5.25%?

That would give us a monthly mortgage payment of $911.14 and a debt to income ratio of 54.23%. That’s not quite at 50% and ideally we want to be under 50%. So what else can we do?

We can:

• Double check our expenses for items that shouldn’t be included (such as work-related expenses)
• Call our credit card companies and ask for a reduction in monthly payments
• Reduce our utility bills by cancelling premium cable subscriptions, opting in to programs that reduce utility bills in exchange for power-flexibility in the summer, switching to a smaller trash can size, etc.
• Exclude expenses like eating out, food, clothes and discretionary expenses from your DTI

Because your monthly expenses can fluctuate quite a bit each month you want to focus on big ticket items and not rack up lots of little dings.

What if we:

• Saved $300/month by not eating out
• Canceled a gym membership worth $100/month
• Reduced our utilities by $50/month

That would give us a DTI of: 45.22% – bingo. That’s the number we want to work with.

So when we complete our monthly expense worksheet we’re going to report the big ticket items that are always there, but we’re going to leave off for now the variable items that we can control, such as food, etc.

If they ask for it later we’ll give it to them; but for now we want to present a case that with a new “hoped for” mortgage amount (the modified rate and monthly payment) plus our monthly expenses that we’re a good candidate for a mortgage at under 50%.

Tip: Never lie to your bank. What we’re doing here is making an assumption that we can control variable monthly expenses through good judgment and sacrifice in order to keep our home. If we must present this information we will.

In the next article we’ll talk about tips for qualifying for a loan modification.

This is a second in a six part series on loan modifications written by Morgan Brown at Blown Mortgage. Please be aware that I can not help you with loan modifications. You should contact your loan servicer or a local mortgage company which specializes in loan modifications if you are seeking assistance. The Arizona Mortgage Team blog has information for those who are in the Phoenixa, AZ market.

Part 2 of 6

Loan Modifications – Doing your homework

Once you’ve received your loan modification application from your lender it’s time to do your home work. What do we mean by “your homework?” We mean simply the collecting and ascertaining of your income and expenses in order to successfully complete your loan modification application.

In brief – think back to the documentation you needed to apply for your loan, you’ll need essentially that information in order to complete your loan modification application.

A typical loan modification financial worksheet will request the following information:

• Contact Information
• Property information including estimated value
• Current monthly income
• Additional income (not wages) such as social security, child support, welfare, etc.
• Estimated value of all assets
• Home
• Other real estate
• Checking accounts
• Savings
• IRAs
• 401(k) accounts
• Stocks, Bonds, CDs
• Auto 1, Auto 2, Boats, RVs, etc.
• Other investments
• Liabilities (monthly payments and balance owed)
• Alimony – Child support
• Dependent care / child care / tuition
• Cable /cell phone
• Other mortgage(s) / rent
• Personal loan(s) / credit cards
• Medical expenses
• HOA fees / taxes / insurance
• Automobiles
• Tax liens
• Utilities
• Auto expense (gas / maintenance)

Collect the following:

• Two most-recent months paystubs for you and your spouse (if you both work)
• Three months bank statements for your primary checking and savings accounts
• Last year’s W2 or 1099s
• Most recent statement for any other types of income – social security, disability, etc.
• Most recent mortgage statement
• Most recent home equity line statement or 2^nd mortgage as appropriate
• Most recent credit card statements
• Most recent student loan statements
• Most recent car loan statement(s)
• Most recent home owners’ association statement as applicable
• Most recent statement for other debts as applicable

Keep all of this information in your notebook or a separate folder. You’ll be using this information a lot so keep it handy.

Now, we need to get a sense of your monthly expenses that aren’t a part of the above debts. Using either your past banks statements or your best accounting, estimate the following monthly expenses:

• Food costs (dining in and eating out)
• Clothing costs (per person)
• Utilities cost (including phone, cable, electricity, water, gas, trash and cell phones)
• Daycare or private school costs
• Assisted living costs
• Health insurance costs not automatically deducted out of your paycheck
• Gym memberships or other membership charges

Once you’ve collected all of that information it’s time to complete your monthly expense worksheet. This monthly expense worksheet is going to determine your debt-to-income ratio. This is the single most important item in determining your eligibility in getting a loan modification.

Tip: It’s never recommended to try to calculate this information while on the phone with a bank representative. It is too important to do off the top of your head. Set aside some time to sit down with some quiet time with you and your spouse and go through the numbers carefully.

In the next post in the series we’ll go in to qualifying for a loan modification. For now, if you’d like a sample monthly expense worksheet you can download one for free by joining Blown Mortgage’s Loan Modification Tips mailing list.

Morgan Brown, blogger at Blown Mortgage, has sent me some information on loan modifications which he has kindly indicated can be posted on our blog. Due to the length of the information I will be posting it in a six part series. The information will be posted in its entirety with out any edits. I am posting this only because I believe this will help answer some of the questions I have received on loan modifications.

Please be aware that I can not help you with loan modifications. You should contact your loan servicer or a local mortgage company which specializes in loan modifications if you are seeking assistance. The Arizona Mortgage Team blog has information for those who are in the Phoenix, AZ market.

Thanks.

Part 1 of 6

Loan Modification 101 – The Basics

Mortgage loan modification, the changing of terms on an existing home loan, is becoming a well-known practice as the US housing market continues to crater. Borrowers who find themselves underwater on their mortgage – owing more than the property is currently worth – and facing a rising monthly mortgage payment are being encouraged to pursue relief through modifying their home loan. But for all the news and hype around loan modifications very few homeowners really understand what goes in to getting their home loan terms changed to a level that they can afford.

In this series of posts we’ll teach you the basics of how the loan modification process works so that if you’re considering a loan modification you’ll understand how to give yourself the best chance of successfully completing the process.

In this series on loan modifications we’ll cover:

• How to start the loan modification process
• Doing your homework
• Determining if you qualify for a loan modification
• Tips for qualifying for a loan modification
• Negotiating new loan terms
• Finalizing your loan modification

A Note on the Loan Modification Process

Because each loan and each lender, mortgage servicer or mortgage investor is different the process may be slightly different in your situation. Use this information as a guideline; but be sure to follow the specific requirements of your lender. Additionally, every loan has to be evaluated on its own merits. That means that a loan modification can take anywhere from 30 days to 90 days to complete. Your organization, persistence and diligence will make the difference in shaving days off the process.

A Note on Loan Modification Companies

Federal housing law makes taking money upfront for a loan modification illegal. Many loan modifications get around this by affiliating themselves with a lawyer, and collect a retainer for legal service. Others collect a processing fee for submitting your loan package. Either way, be warned that paying to have a loan modification company do your modification application for you does not guarantee success. And, there are many unscrupulous characters moving in to this space. The Department of Housing and Urban Development (HUD) urges extreme caution if you choose a company to represent you in the modification process.

You can learn more about doing your own loan modification here.

Getting Started with a Loan Modification

The mortgage payments are soaring because your ARM reset, or your income was cut in half, or two-thirds, or completely by a recent layoff. The bills are piling up and the savings is disappearing quickly. You need relief, and you’ve heard a lot about loan modifications as part of the way out of your financial train wreck. You’re not alone, millions of Americans face foreclosure every day and the specter of losing a home is one of the most emotionally and mentally grueling challenge a family can face. The first thing to getting started with a loan modification is: to pick up the phone.

Astonishingly, in more than 50% of homes that go in to foreclosure the homeowner never picks up the phone to talk to the lender. This seems counter-intuitive, but in reality, makes perfect sense. Too many homeowners feel helpless and give up before they even try. To get a loan modification your first step is to try – to pick up the phone.

Who to call to start a loan modification

Find your statement for your first mortgage and call the customer service number. Get to a customer service representative as fast as you can.

TIP: Note this sequence down in a notebook. The notebook that you’re going to dedicate to tracking your efforts to get your loan modified. Keeping the keystroke sequence (e.g. 1,1,5,0) will allow you to bypass the automated menus and get you to people faster. Since you’ll be spending a lot of time on the phone this will come in handy. Trust me.

Once you have a customer service rep on the phone ask the representative to transfer you to the “loss mitigation department.” This is the department that you’ll be working with on your loan modification. Before you are transferred ask for the direct number to the department. You guessed it. Jot that number down in your notebook.

You’ll be greeted by another low-level rep in the loss mitigation department. These low level reps handle inbound calls and try to vet the calls to find people who have a chance at qualifying for a mortgage. What you want to tell them is that you’re facing “imminent default” due to a change in your financial situation and that you need to get an application for a loan modification faxed or emailed to you immediately.

TIP: Note that the rep is going to try to get as much information out of you as possible upfront, including perhaps, your monthly income and expenses. Defer answering these questions by saying “I don’t have that information handy.” DO NOT provide estimates or guess. These reps are trying to get a quick calculation on your debt-to-income ratio (which we’ll address later) to see if you make the cut. Do not play roulette with your loan modification chances by answering these off the top of your head. Ask for the application and say you’ll fill out your financial information on the application.

TIP: Get the name of the rep and their EXACT extension number. If they resist be persistent. You’ll speed your process by working with someone specific as opposed to going in to the call round-robin each time. YES. You’re putting that information name, phone extension, time and date called, notes of the conversation in to your notebook.

If you don’t get the application shortly follow up with the person. You’ll be doing a lot of following up so not to worry. Just be pleasant and persistent. Remember that loan modification departments are swamped right now and the people on the other end of the phone are just that – people. By remembering that you’ll be able to effectively move through the process in the most beneficial manner possible.

Got the loan modification application? Great! Get ready for step two. Doing your homework.