Loan Modification ( Debt - Income Question )

[JameyT]

My husband just recently lost his job, and we are looking into a Loan Modification through Bank of America (initially the loan was with Country Wide). I called the bank and they told me the information they needed. I would like to confirm with anyone out there, if the information on our debt (expenses) vs. income does in fact affect the possibility of even qualifying for a Loan Modification. A friend told me that our "left over money" every month should be somewhere between positive $400.00 & negative $300.00. Due to the fact, that our LTV = 146%, she said we don't want to be too in the negative or else the bank would just deny us right away. Is this true? Any advice would be greatly appreciated!

[LHarveyMadman]

Your LTV is irrelevant for the purposes of a modification. Yes, you are upside down, like a lot of people these days, but being upside down does not exclude you from receiving a modification. If anything, a modification is more likely if you have no other options available to you (e.g. a conventional refinance).

The debt-to-income ratio is calculated by looking at your monthly debt payments, not your total indebtedness. Under the modification plan offered by the government, there are two DTIs that are looked at: the front-end DTI, which is ratio of your monthly PITIA payments (principal, interest, property taxes, homeowners insurance, and association fees) to your monthly gross income. The back-end DTI includes the PITIA plus any additional scheduled debt payments - student loans, car loans, personal loans, credit card payments, payments on second homes/investment properties.

[angel83]

So, on the backend - what are they really looking for? So many people now have had to use CC's to survive - how much weight does that carry? Negative or Positive?

[LHarveyMadman]

Originally Posted by angel83

So, on the backend - what are they really looking for? So many people now have had to use CC's to survive - how much weight does that carry? Negative or Positive?

If you were apply for new mortgage at this time, the lenders will be looking for a back-end DTI that falls below a certain amount. This varies with the lender - some might only allow a back-end DTI of 40%, some might be at 38%, others might go up as high as 50%.

For the government modification plan, there doesn't seem to be a specific back-end DTI limit, but if your back-end DTI would be above 55% even after a modification, you must agree to HUD counseling as a prerequisite to getting a modification.

The credit card payment that is factored into the DTI is the minimum amount due. So, if you have a credit card balance of $5000 but are only required to pay $50 a month, it is that $50 that is used in the DTI calculation. The higher the CC balance, the higher the minimum payment, so if you've had to run up a lot of CC debt, then it will increase your back-end DTI and potentially push you over the 55% threshold for counseling.