How Likely Am I to Get Approved for a Loan Modification?
Nowadays, everyone wants to know the same thing… How likely are they to get approved for a home loan modification? While no one can answer that question with any level of certainty — after all, everyone’s situation is different from everyone else’s — there are contributing factors and circumstances that both increase and decrease a loan modification’s likelihood.
The following question is one I see a lot. Take a look and see if my response helps you determine how your current financial situation might impact your ability to secure a loan modification:
Question: I am hoping to get my mortgage modified to affordability, refinance my loan, get help in selling my home through a short sale, or secure a payment deferment or forbearance. Can you look over my details and tell me what you think?
Currently, my mortgage payment is $2,226.00 per month, which I am hoping to reduce in half to avoid foreclosure. Unfortunately, I have fallen behind on my monthly payments due to a divorce. Considering my current monthly income of $3,945.86, I am struggling. I have contacted my lender on numerous occasion but they weren’t able to help. I have even taken a hard look at my financial situation with a credit counseling services. My home is in San Joaquin county in Northern California, and here are some additional details:
- A single family home
- Owe $416,000.00
- 10 year Arm loan with interest only (since 2005)
- I have PMI on the loan
- $2,226.00 monthly payment
- I pay my own Insurance and taxes
Thanks in advance for your thoughts and advice.
Answer: The fact that you sought out credit counseling is a great first step and shows your commitment to honoring your commitments including the commitment to your mortgage.
Based on the rough numbers you gave me it appears that your front end Debt To Income (DTI) ratio for your mortgage is nearly 56% (presuming the income # you gave was gross income) and that’s not including your taxes and insurance. It is no wonder you’re struggling.
My “Ralph’s Rule of Thumb ” is that DTI ratio over 30% is a ticking time bomb. I know your ex probably contributed to the household income so the ratio was more in line with that percentage and has just become unmanageable since the divorce.
A divorce can be a qualifying hardship when it comes to qualifying for workout and modification programs with your lender. I know you have not had much luck dealing with your lender, but the rules have somewhat changed since March 4th, 2009; you might now qualify.
If your servicer and investor are participants in the new Making Home Affordable Plan. you might find a more accommodating voice on the servicer end of the telephone. You need to act quickly however so that the foreclosure is adjourned. Most lenders are halting foreclosure while they see if the borrower qualifies for a modification, but you need to make sure yours is one of them.
Here’s how your situation might fit into the Obama Plan. as it’s commonly called.
- You would need to undergo credit counseling because of the high DTI, but you already have, so point for you. You need to have a verifiable hardship, divorce would qualify, another point for you.
- You are delinquent so you’re at risk of losing your home to foreclosure, another point for you (under the plan).
- You own and occupy the home, yet another point.
- The first (and only) loan is under $729,750, add a point.
- You have income and can afford to make a payment, just not this high payment, and you’re in a risky interest only ARM loan, two more points.
Where it becomes tricky is
your investor needs to modify your payment down to a 38% DTI, and then partner with the Treasury Department to bring the DTI down to the targeted 31%. This 31% is PITIA (Principal, Interest, Taxes, Insurance, Association fees, but not PMI). This could mean that your loan is more costly to modify than to foreclose. Huge point against you, and really this could be a deal-killer.
Using the numbers you provided and presuming the $3,945.00 is a gross monthly income number, that would mean that you need to get the PITIA payment down to about $1,223.00/month and this payment needs to include PITIA. ($3,945.00 x 31% = $1,223.00) Meaning you need to get your payment of $2,223.00 lowered approximately $1,000.00.
Okay, let’s assess it:
- The Waterfall Approach starts by reducing the interest rate and fixing it for 5 years (min).
- The minimum interest rate that can be charged is 2%.
- Drop you all the way down to 2%, you’ll need it.
- The next item in the hierarchy is to extend the term out to up to 40 years.
- Extend your term all the way out to 40 years, you’ll need it.
- So based on those two changes a $416,000 loan at 2% with a 40 year amortization = $1,259.75 just in P&I.
- Getting close, but you need to include Taxes, Insurance and Association fees (if any) as well so we need to get the investor to also either forbear or forgive principal.
- Not knowing what the taxes and insurance costs are for your area, I’m just going to give you a range of numbers that need to come off the principal so you have a payment of $1,223.00 that includes everything (PITIA), and to do that I’m going to set the taxes at $4,000.00 annually and the insurance at $1,000.00. That gives you $416.67 dedicated to T&I each month ($5,000.00/12 = 416.67).
- Okay, so given that your total payment can only be $1,223.00 to fit within the 31% rule, your monthly P&I payment can’t exceed approximately $810.
- The Investor would have to forbear or forgive between $150,000 and $155,000 to bring the payments down to a 31% DTI. ($265,000.00 at 2% for 40 years = $803.00/month). $803.00 (P&I) + $417.00 (T&I) = $1,220.00.
Not impossible, but if the Net Present Value (NPV) of cash flows with the modification is less than the NPV of the cash flows without the modification, the modification is purely discretionary. If the Investor denies the modification, under the Plan, alternatives to foreclosure should be sought, but the house will not be staying in your name.
So my final answer is you may qualify (for a loan modification), but if not, you can clearly show that you can’t afford the house and securing a deed in lieu of foreclosure (DIL) or permission to pursue a short sale should not be extremely problematic. There is so much to consider when trying to see if you qualify for the Obama modification, that I suggest homeowners seek out some professional help. The Treasury Dept. tells you that you can do it all yourself and the cost of a modification is FREE. That’s true, but you’re also placing your future in this home into the hands of the same people that placed you in this loan in the first place. I can’t tell you to run out and hire a company to act as your representative, that’s a decision you have to make on your own. What I can tell you is that you should consider what’s at stake and whether the cost of assistance has value.
Note: The numbers used in this example may not be reflective of your true situation and may not accurately qualify or disqualify you for any loss mitigation workout. The numbers exercise above is for example purposes only and is strictly hypothetical.