Finance, Loan, Debt and Credit.

February 26, 2011

How to Figure Your Debt Ratio

Frustrated and confused about how you can qualify for a loan modification? There are a couple of important tips and secrets the professional know that will help you to present your home loan lender with a loan modification application that will get a quick review and have a better chance of approval. Once you learn how to present your unique situation in an acceptable format, you will be on your way to lowering your home loan payment.

Borrowers will often be declined due to their debt ratio. This is one of the key factors a lender looks at when deciding to grant a loan modification. Yet most homeowners have no idea what their debt ratio is, or how to figure it out so they will qualify for a loan modification. Just what is a debt ratio and how do you figure yours? Simply put, debt ratio is a percentage figure that represents how much of your gross income is spent each month on your housing expenses. Housing expense is the total of your principle and interest payment, property taxes, insurance and HOA dues if applicable.

To get a loan modification approval, your debt ratio must be at an acceptable percentage. What is acceptable? Well, it may vary slightly between lenders, but most require a maximum of 45% debt to income ratio. If you submit a loan modification application to your lender with a substantially higher debt ratio, you will almost always be denied. You need to prove to your lender that you will be able to afford the new house payment, now and in the future by having an acceptable debt ratio.

So, take a minute and pull out your current mortgage statement, your annual tax bill, insurance bill and HOA statement (if applicable). Divide the annual tax bill and insurance bill by 12 to get the monthly payment amount. Add up the amount for each item to arrive at the total monthly housing expense. Now divide that total by your gross monthly household income. For example:

$1300 principle & interest + $110 monthly property taxes + $60 monthly insurance + $60 HOA = $1530 housing expense

$1530 divided by $3600 gross monthly income = 42% deb ratio

Since you are having trouble making your current payment, your current debt ratio will probably be higher than 45%. Now comes the important part, you have to calculate your debt ratio again, this time using the lower, proposed monthly mortgage payment in the calculation. This is how you prove to your lender that while you cannot afford the current payment, you will be able to make the new payment and they should grant the loan modification. You show them mathematically, in black and white that you will not fall behind or default again.

There are several more important aspects of a successful loan modification application that will help your chances when apply for a loan workout with your lender. Take the time to get informed about the loan modification process and be prepared before you contact your bank. Just a little time and effort learning about how to prepare an acceptable loan modification application could mean the difference between approval or being denied. Your family home and credit are certainly worth the effort! So get informed and get going.

Incoming search terms for the article:

Powered by WordPress