subject: How to determine if you are a candidate for a loan modification [print this page] How to determine if you are a candidate for a loan modification
Lenders and servicers will, in general, look for one thing when you submit a modification request. They look for a documentable hardship of course, but at the end of the day, if they decide to grant your request for a loan modification all they really want to know is if you can afford the new payment(s). This is the BIG secret behind getting a loan modification.
You must disqualify yourself from your old payments and at the same time qualify yourself on a new payment structure. It sounds complicated but you will quickly learn important strategies for effectively processing loan modifications.
To understand what the lender or servicer considers qualified, you have to know how lenders calculate your income. The income you can use to qualify for a modification is different from traditional income calculations used to qualify for traditional loans. The difference in the qualification guidelines is typically in your favor.
For a modification, you can qualify based on your documentable total household income. You can count income from almost any source; Grandma's social security income, income from child day care services, from a second job paid under the table, etc, SO LONG AS IT CAN BE PROVED. Proof must be in the form of bank statements, 1099's, W-2's or some other documentable form as outlined in the submission paperwork you will provide your lender. In addition, if only one of two spouses was on the original loan, the other spouse's income can now count as long as it is documentable.
Once you calculate all documentable monthly income from all household sources, you then have what you can present to the lender as the new qualifying income. To calculate a qualifying mortgage payment, use the benchmark fully amortizing 5.00% rate on whatever the new balance might be, counting arrearages if they are added back into the loan. (THIS AMOUNT IS ONLY A QUALIFYING EXERCISE RATE) If the payment at this rate is too high, then you may NOT be an appropriate candidate for a loan modification.
As a general rule of thumb under the FHA lending guidelines, you cannot take more than 31% of your monthly gross income for your monthly Mortgage Principal, Interest, Tax, Insurance and HOA. Or 41% of your monthly gross income for your monthly Mortgage Principal, Interest, Tax, Insurance, HOA and your combined monthly fixed payments (such as car, credit card, medical, child support, etc). If your payment ends up being higher than that amount, your lender would have to reduce the amount of your actual mortgage amount.
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