As a loan modification attorney, many people ask me “what debt to income ratio is need for loan modification?” There is, unfortunately, no universal answer that applies to all lenders and all situations, but a few themes have developed in regard to home loan modification. For homeowners seeking to apply for a home loan modification, here are a few things you may not know about what lenders are looking for when it comes to your debt to income ratio:
“Debt” is Broadly Defined for Loan Modification
Most lenders define “debt,” for purposes of what debt to income ratio is need for loan modification, quite broadly. Debt is anything that you actually pay on a monthly basis, but also includes things you aren’t paying or haven’t been paying as well. These items can include credit card payments, student loan payments, property taxes, homeowners association payments, homeowner’s insurance, home maintenance and other costs, car payments and expenses, food, child care, entertainment, education, clothing, etc. Many homeowners who find themselves in need of a loan modification have stopped paying some of these things, but the lender will still consider them as “debts” for purposes of your loan modification.
Leaving Something Out Typically Does Not Help
Obviously your lender has been through the loan modification process many times before, so they have a good idea of what you spend money on whether you specifically list it or not. For example, they know if you have children (tax returns, original mortgage application), so they know you’ll have child care expenses if both parents work. Leaving it off your loan modification application often doesn’t help because they simply factor it in anyway. Same with homeowners insurance, home maintenance, utilities, etc.
Credit Card Payments and Loan Modification
Often times, homeowners in tough financial situations simply stop paying on credit cards or other revolving loans. This may be a good strategy for cash flow purposes, but it oftentimes backfires for their debt to income ratio and loan modification. The lender will almost always pull a credit report when you apply for a loan modification, not because your credit score is a criteria, but to see what other obligations you have. The biggest outside obligation is typically credit card payments. Even if you’re not paying them, the lender will factor in credit card payments as part of your monthly obligations and make their loan modification decision accordingly. One way to counteract this issue is for a homeowner seeking a loan modification to first file a chapter 7 bankruptcy to wipe out all other qualified debts and go into their loan modification negotiations with few, if any, other obligations.
How to Calculate Debt to Income Ratio for Loan Modification
Generally, the simplest way to calculate a debt to income ratio for loan modification is simply to take total monthly debt obligations and divide it by total monthly gross household income. Anything over about 60-70% is pretty good for loan modification purposes. Anything over about 90% probably will not be approved by the lender. The higher the debt to income percentage, the more of a homeowners monthly income is already “spoken for” and any bump in the road would lead to another default (which is exactly what the lender doesn’t want).
The most important factor for lenders when considering loan modification is not just what income is required for loan modification, but also the quality of income and consistency. The whole equation typically hinges on the borrowers income. If the lender is convinced the borrower has solid, reliable income, they are in a much better position for a loan modification. There are no definitive rules though, and every lender is different. It may be possible to present the income information in a way most favorable to the homeowner and get the loan modification approved, even if it would otherwise have not been considered, so don’t give up.
California Loan Modification Attorneys
McFarlin LLP attorneys handle all aspects of loan modification for borrowers in San Diego, Orange County, Los Angeles, San Jose, Santa Clara, Oakland, Sacramento, Mission Viejo, Laguna Hills, Tustin, Whittier and throughout California. Our attorneys are available to provide you with honest reliable advice at our Irvine Office or over the phone. With a matter as important as loan modification and foreclosure, it is a very good idea to consider hiring a qualified California loan modification attorney to represent you and protect your interests. Call us today at (888) 728-0044.