Mortgage servicers will, in general, look for two main things when you submit a modification request. They look for a documentable financial hardship and what they really want to know, which is if you can afford the new proposed modified payment(s).
To afford a modified payment, they simply expect you to be gainfully employed long-term.
So if you are currently working at a job or have income coming in from your own business and can prove this to your mortgage servicer that with your income you can afford your home at a lower interest rate, then you may be eligible for a mortgage modification.
There is however, an art to making loan modifications work.
You must disqualify yourself from your old payments, and at the same time qualify yourself on a new payment structure. It sounds complicated and it is at first, 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. Moreover, the difference in the qualification guidelines is typically in your favor.
For a modification, you can qualify based on your documentable total household income.
This income can come from almost any source such as: Grandma’s SSI, 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 or in some other documentable form as outlined in the submission paperwork you will provide to the lender. In addition, if only one of two spouses was on the original loan, the other spouse’s income can count so long as it is documentable.
Once you calculate all documentable monthly income from all household sources, you can then present to your mortgage servicer the new qualifying income.
To calculate a qualifying monthly mortgage payment, use the benchmark fully amortizing 4.50% rate on whatever the new balance might be, counting arrearages if they are added back into the loan. WARNING: this is only for a general qualifying exercise only; do not expect this rate or payment! If the payment at 4.50% is just too high, then you may not be an appropriate candidate for a modification.
However, you can still request help with other services such as a deed in lieu of foreclosure, a short sale, or postponing as long as possible a notice of trustee’s sale in an effort to help you transition to more affordable housing. In addition, many modification programs will offer “step-rate” terms which will provide an extremely low-interest rate for the first five years (generally 2%).
Mortgage servicers have agreements with mortgage investors to pay the servicers to collect mortgage payments on the investor’s behalf and lose as little principal as possible if a borrower does not pay on time. Loan modifications do not have to be considered until “default” (not paying the mortgage and being late more than 60 days generally speaking) is deemed “imminent” or already achieved.
Imminent means that an event is about to happen such as the case, for example where a borrower dies and the co-borrower has already depleted all the funds required to pay the mortgage, or when a borrower is separated, divorced, disabled or there is a dissolution of business if self-employed. The “DDDD” as I like to call it. The imminent risk is determined completely subjectively, not objectively, by the mortgage servicer’s underwriters and requires hard and conclusive proof that the loan is about to be going into default.
The strongest proof of imminent default would include, for example, a mortgage payment PITIA increasing due to loan adjustment or escrow payments increasing by more than 7.5% of the existing mortgage payment, or $75 out of every $1000 of mortgage PITIA; therefore, increasing the monthly PITIA to above 31% of the gross income of the borrower.
If your loan payments per month are not affordable based on the current interest rate in effect for your loan and remaining term until its paid off, then you should check to see what rate and what term would make your loan affordable by reducing the interest to a floor of 2% and a term of 480 months at most in the amortization calculator. If your payments are still not affordable, then you can start to reduce the principal that is accruing interest by only the amount that is greater than 115% of the value of your home.
But in the end, try to keep it simple, and if all this gets confusing revert back to my simple explanation at the beginning of this section. All they really want to know is if you can afford the new payment. If you focus on that more than all the financial nuances, then it won’t get you confused. At the end of the day, you only make so much money, have so many bills and can afford so much of a payment. That is what it is all going to come down to in getting approved for a loan modification.
This article was co-written by Michael Nazarinia