Mortgage Modification: Who qualifies?
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Initially, lenders strictly adhered to the seven guidelines explained below when awarding mortgage modifications. Today thats no longer true. Theyre now limiting their analysis to fewer of the original criteria as the crisis deepens and the workload increases. In fact, the range is surprising and somewhat inconsistent. This indicates to me that the rules are being written on the fly.
Virtually all lenders are using cascading calculations, whereby one set of calculation results are used in the subsequent calculation. Therefore, no one criterion is final; rather, qualification depends on a combination of factors.
Ability to pay: This is your ability to meet the obligations of the modified loan. Customary underwriting criteria are used, so take 55% of your gross monthly household income. That is a rough estimate of how much monthly debt payment the lender will allow. This is your target amount after modification.
Debt to Income Ratio is the term that lenders use to describe this underwriting guideline. Its simply your total monthly debt payments, including cars, credit cards, student loans, and others, divided by your Gross Monthly Household Income.
Type of Loan: 100% of Negative Amortizing Adjustable-Rate Mortgages (NegAM) loans will be approved for modification to fixed rate loans. Almost no fixed rate loans with rates lower than 6.0% will be modified. Everything in between is fair game.
Hardship: Six hardships are commonly accepted:
Divorce or separation
Loss of income
Reduction in income
Death of spouse/co-borrower/family member
Illness
Military service.
Lets face it, with the economic downturn there are literally millions of Americans whose ability to meet monthly payments has diminished. So theres no shortage of hardship. The lender simply needs to know personally and specifically what your hardship is.
Occupant: Owner-occupied homes are the easiest. However, even HELOC loans on investment properties are being modified.
Default status: The FDIC Guidelines are that the borrower must not have filed bankruptcy during the life of the loan and a foreclosure sale must not be imminent. The Guides also state that borrowers should be encouraged to apply even if theyre not late on payments.
In reality, applications from borrowers who are current on their loans arent getting good modification offerseven with all the announcements to the contrary.
Age of loan: You can expect that any loan older than 9 months will be considered for a modification.
Balance Sheet strength: Whether you have significant additional ets beyond the property may be an issue, especially if the loan was a refinance with equity taken out or is a Home Equity Line of Credit (HELOC).
The first guideline is most important ability to pay. The modification will be approved by an underwriter who will apply standard qualifying criteria to your application. YOU MUST BE ABLE TO DEMONSTRATE THAT YOU CAN MAKE THE MODIFIED LOAN PAYMENTS. Beyond this, you need to make a strong case for at least one of the other two major guidelines.
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Homeowners who dont qualify are in situations either too bleak (such as too close to foreclosure) or too solid (such as no duress and with good loans).
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