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So far in this series we’ve talked about the process of loan modifications, how to get started and how to collect the information you need to accurately complete your monthly expense worksheet. The monthly expense worksheet is going to be used by your lender to determine if you qualify for a loan modification or not. Therefore this is an extremely important step that must be taken with care. Once you submit your monthly expense worksheet it becomes part of your file and is very hard to change it once submitted. Take your time and make sure it is correct!

Tip: Never lie on your monthly expense worksheet. Loan fraud is a federal crime. Knowingly submitting false information will jeopardize your modification application and may subject you to legal action from your lender.

Understanding debt to income ratio (DTI)

Debt-to-income (DTI) is the key determinant in most lending situations. In a traditional home loan the DTI plus the loan to value (LTV) play roles; but in a modification it is assumed that the LTV is negative (you are upside down on your home and unable to refinance) so the key decision factor is DTI (along with your credit worthiness as demonstrated by your monthly payment history and credit report).

DTI is calculated as follows:

Total Monthly Expenses / Total Gross Income

For example if your gross monthly income is $5,000 per month (you make $60,000 per year) and your monthly expenses are $3,000 then your DTI is:

$3,000 / $5,000 = 60%

Understanding gross monthly income

Before we can accurately calculate your DTI we need to accurately calculate your gross monthly income. Gross means the dollar amount you earn before deductions such as state and federal taxes, health insurance, 401(k) and FSA contributions.

If you are a salaried employee this is relatively easy to determine. Take your yearly salary and divide by 12. This number is your gross monthly income. If you make $60,000 per year, your gross monthly income is $5,000.

Tip: Many salaried people are paid every two weeks, not twice a month. Being paid every two weeks means you receive 26 paychecks instead of 24 (bi-monthly checks). If you take your last two paychecks and add them up before deductions you have short-changed yourself in calculating your DTI. Double-check with your employer to see if you get 26 or 24 paychecks in a year, or better, use the method described above to get your gross monthly income.

If you are paid by the hour this becomes a bit more difficult. First, you cannot count overtime pay towards your gross monthly income. Even if you’re a California-state prison guard who has been working overtime for 5 years in a row, you still have to use your base hourly income to qualify.

Take the last two-months paychecks (4) and add up the hours (except for overtime). Divide by 2. That is your average monthly hours worked. Take that hour amount and multiply it by your hourly wage. If you worked an average of 160 hours per month (40 per week) and make $20 per hour you make $3,200 per month gross income.

Tip: Including overtime is one of the biggest reasons loan modifications get rejected for hourly workers. Don’t include it in your monthly calculation. The bank won’t count it and calculating your DTI including overtime will throw off your calculation.

If you receive social security or long-term disability you may be able to “gross up” you benefits. Because social security is not taxed banks often add 25% to the value of your monthly benefit to more accurately represent the value of this money. Be sure to ask your bank if they “gross up” social security before doing the calculation with “grossed up” social security.

How to “gross up” social security:

$1,000 monthly social security benefit x 1.25 = $1,250 grossed up benefit for DTI calculation

Tip: Most banks gross up these benefits, but we always recommend asking your representative in the loss mitigation department if they gross up social security in their underwriting to ensure that you’re making an accurate calculation.

Target debt to income ratio

The target debt to income ratio that you’re looking to achieve is 50%. That means that your total monthly expenses including your mortgage comprise only half of your gross monthly income. If you make $5,000 per month ($60k/annually) your monthly expenses can’t be more than $2,500.

In reality, if you’re considering a loan modification, it is likely that your monthly debt to income ratio is closer to 100% or worse. The modification is going to help that, and we have to figure out what that will do to the ratio first.

Calculating a reduced mortgage payment

This step gives you an idea of what you’ll negotiate for when you submit your package to the bank. Use an online mortgage calculator (there’s a good one at bankrate.com: http://www.bankrate.com/brm/mortgage-calculator.asp but anyone will do) to play around with different loan modification scenarios.

Tip: Banks will typically not reduce your principal owed, and rather adjust the interest rate to reduce your payments. They will typically reduce them between 2-4%. If you qualify for the new Making Home Affordable federal modification program you may be eligible for an even greater reduction. We will talk more about that program in future posts.

Example mortgage calculation

Say you have a $165,000 mortgage that recently adjusted from 5.25% to 9.25%. Your situation would look like this:

Loan amount: $165,000

Term: 30-years

Interest rate: 5.25%

Monthly payment: $911.14

After adjustment

Loan amount: $165,000

Term: 30-years

Interest rate: 9.25%

Monthly payment: $1357.41

Lets say that you’re still making that $60,000 per year and that you had total monthly expenses (not counting your mortgage) of $1,800 per month.

Your DTI prior to adjustment:

$1,800 + $911.14 = $2,711.14 / $5,000 = 54.23%

Your DTI after adjustment:

$1,800 + $1,357.41 = $3,157.41 / $5,000 = 63.15%

Now the target DTI is 50%. Some banks vary and it’s very hard to get them to tell you exactly what they’ll accept; but industry standard is 50%. They’ll sometimes accept higher; but if you’re not near the 50% mark you’ll often not qualify for a modification.

So what can we do to get down to a 50% DTI in the above example?

Well we can request a modification of our mortgage back to the original 5.25%?

That would give us a monthly mortgage payment of $911.14 and a debt to income ratio of 54.23%. That’s not quite at 50% and ideally we want to be under 50%. So what else can we do?

We can:

• Double check our expenses for items that shouldn’t be included (such as work-related expenses)
• Call our credit card companies and ask for a reduction in monthly payments
• Reduce our utility bills by cancelling premium cable subscriptions, opting in to programs that reduce utility bills in exchange for power-flexibility in the summer, switching to a smaller trash can size, etc.
• Exclude expenses like eating out, food, clothes and discretionary expenses from your DTI

Because your monthly expenses can fluctuate quite a bit each month you want to focus on big ticket items and not rack up lots of little dings.

What if we:

• Saved $300/month by not eating out
• Cancelled a gym membership worth $100/month
• Reduced our utilities by $50/month

That would give us a DTI of: 45.22% – bingo. That’s the number we want to work with.

So when we complete our monthly expense worksheet we’re going to report the big ticket items that are always there, but we’re going to leave off for now the variable items that we can control, such as food, etc.

If they ask for it later we’ll give it to them; but for now we want to present a case that with a new “hoped for” mortgage amount (the modified rate and monthly payment) plus our monthly expenses that we’re a good candidate for a mortgage at under 50%.

Tip: Never lie to your bank. What we’re doing here is making an assumption that we can control variable monthly expenses through good judgment and sacrifice in order to keep our home. If we must present this information we will.

In the next article we’ll talk about tips for qualifying for a loan modification.

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Once you’ve received your loan modification application from your lender it’s time to do your home work. What do we mean by “your homework?” We mean simply the collecting and ascertaining of your income and expenses in order to successfully complete your loan modification application.

In brief – think back to the documentation you needed to apply for your loan, you’ll need essentially that information in order to complete your loan modification application.

A typical loan modification financial worksheet will request the following information:

• Contact Information
• Property information including estimated value
• Current monthly income
• Additional income (not wages) such as social security, child support, welfare, etc.
• Estimated value of all assets
• Home
• Other real estate
• Checking accounts
• Savings
• IRAs
• 401(k) accounts
• Stocks, Bonds, CDs
• Auto 1, Auto 2, Boats, RVs, etc.
• Other investments
• Liabilities (monthly payments and balance owed)
• Alimony – Child support
• Dependent care / child care / tuition
• Cable /cell phone
• Other mortgage(s) / rent
• Personal loan(s) / credit cards
• Medical expenses
• HOA fees / taxes / insurance
• Automobiles
• Tax liens
• Utilities
• Auto expense (gas / maintenance)

Collect the following:

• Two most-recent months paystubs for you and your spouse (if you both work)
• Three months bank statements for your primary checking and savings accounts
• Last year’s W2 or 1099s
• Most recent statement for any other types of income – social security, disability, etc.
• Most recent mortgage statement
• Most recent home equity line statement or 2^nd mortgage as appropriate
• Most recent credit card statements
• Most recent student loan statements
• Most recent car loan statement(s)
• Most recent home owners’ association statement as applicable
• Most recent statement for other debts as applicable

Keep all of this information in your notebook or a separate folder. You’ll be using this information a lot so keep it handy.

Now, we need to get a sense of your monthly expenses that aren’t a part of the above debts. Using either your past banks statements or your best accounting, estimate the following monthly expenses:

• Food costs (dining in and eating out)
• Clothing costs (per person)
• Utilities cost (including phone, cable, electricity, water, gas, trash and cell phones)
• Daycare or private school costs
• Assisted living costs
• Health insurance costs not automatically deducted out of your paycheck
• Gym memberships or other membership charges

Once you’ve collected all of that information it’s time to complete your monthly expense worksheet. This monthly expense worksheet is going to determine your debt-to-income ratio. This is the single most important item in determining your eligibility in getting a loan modification.

Tip: It’s never recommended to try to calculate this information while on the phone with a bank representative. It is too important to do off the top of your head. Set aside some time to sit down with some quiet time with you and your spouse and go through the numbers carefully.

In the next post in the series we’ll go in to qualifying for a loan modification. For now, if you’d like a sample monthly expense worksheet you can download one for free by joining Blown Mortgage’s Loan Modification Tips mailing list.

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Getting Started with a Loan Modification

The mortgage payments are soaring because your ARM reset, or your income was cut in half, or two-thirds, or completely by a recent layoff. The bills are piling up and the savings is disappearing quickly. You need relief, and you’ve heard a lot about loan modifications as part of the way out of your financial train wreck. You’re not alone, millions of Americans face foreclosure every day and the specter of losing a home is one of the most emotionally and mentally grueling challenge a family can face. The first thing to getting started with a loan modification is: to pick up the phone.

Astonishingly, in more than 50% of homes that go in to foreclosure the homeowner never picks up the phone to talk to the lender. This seems counter-intuitive, but in reality, makes perfect sense. Too many homeowners feel helpless and give up before they even try. To get a loan modification your first step is to try – to pick up the phone.

Who to call to start a loan modification

Find your statement for your first mortgage and call the customer service number. Get to a customer service representative as fast as you can.

TIP: Note this sequence down in a notebook. The notebook that you’re going to dedicate to tracking your efforts to get your loan modified. Keeping the keystroke sequence (e.g. 1,1,5,0) will allow you to bypass the automated menus and get you to people faster. Since you’ll be spending a lot of time on the phone this will come in handy. Trust me.

Once you have a customer service rep on the phone ask the representative to transfer you to the “loss mitigation department.” This is the department that you’ll be working with on your loan modification. Before you are transferred ask for the direct number to the department. You guessed it. Jot that number down in your notebook.

You’ll be greeted by another low-level rep in the loss mitigation department. These low level reps handle inbound calls and try to vet the calls to find people who have a chance at qualifying for a mortgage. What you want to tell them is that you’re facing “imminent default” due to a change in your financial situation and that you need to get an application for a loan modification faxed or emailed to you immediately.

TIP: Note that the rep is going to try to get as much information out of you as possible upfront, including perhaps, your monthly income and expenses. Defer answering these questions by saying “I don’t have that information handy.” DO NOT provide estimates or guess. These reps are trying to get a quick calculation on your debt-to-income ratio (which we’ll address later) to see if you make the cut. Do not play roulette with your loan modification chances by answering these off the top of your head. Ask for the application and say you’ll fill out your financial information on the application.

TIP: Get the name of the rep and their EXACT extension number. If they resist be persistent. You’ll speed your process by working with someone specific as opposed to going in to the call round-robin each time. YES. You’re putting that information name, phone extension, time and date called, notes of the conversation in to your notebook.

If you don’t get the application shortly follow up with the person. You’ll be doing a lot of following up so not to worry. Just be pleasant and persistent. Remember that loan modification departments are swamped right now and the people on the other end of the phone are just that – people. By remembering that you’ll be able to effectively move through the process in the most beneficial manner possible.

Got the loan modification application? Great! Get ready for step two. Doing your homework.

Image by Getty Images via Daylife

Mortgage loan modification, the changing of terms on an existing home loan, is becoming a well-known practice as the US housing market continues to crater. Borrowers who find themselves underwater on their mortgage – owing more than the property is currently worth – and facing a rising monthly mortgage payment are being encouraged to pursue relief through modifying their home loan. But for all the news and hype around loan modifications very few homeowners really understand what goes in to getting their home loan terms changed to a level that they can afford.

In this series of posts we’ll teach you the basics of how the loan modification process works so that if you’re considering a loan modification you’ll understand how to give yourself the best chance of successfully completing the process.

In this series on loan modifications we’ll cover:

• How to start the loan modification process
• Doing your homework
• Determining if you qualify for a loan modification
• Tips for qualifying for a loan modification
• Negotiating new loan terms
• Finalizing your loan modification

A Note on the Loan Modification Process

Because each loan and each lender, mortgage servicer or mortgage investor is different the process may be slightly different in your situation. Use this information as a guideline; but be sure to follow the specific requirements of your lender. Additionally, every loan has to be evaluated on its own merits. That means that a loan modification can take anywhere from 30 days to 90 days to complete. Your organization, persistence and diligence will make the difference in shaving days off the process.

A Note on Loan Modification Companies

Federal housing law makes taking money upfront for a loan modification illegal. Many loan modifications get around this by affiliating themselves with a lawyer, and collect a retainer for legal service. Others collect a processing fee for submitting your loan package. Either way, be warned that paying to have a loan modification company do your modification application for you does not guarantee success. And, there are many unscrupulous characters moving in to this space. The Department of Housing and Urban Development (HUD) urges extreme caution if you choose a company to represent you in the modification process.

You can learn more about doing your own loan modification here. Watch for the next post in this series “How to start the loan modification process”

There are 138 million taxpayers in the United States and, according to the IRS, 20 percent of them file their taxes within 7 days of April 15.  In a holiday-shortened week, that means that 27 million people had better get a move on.

And while a portion of this year’s last-minute filers will file with storefront operations like Liberty Tax Service or H&R Block, many others will self-prepare with the help of tax software from TurboTax or TaxCut.

If you’re a member of the do-it-yourself crowd, consider taking a review of this year’s tax law changes before starting your returns.  The stimulus package signed into law this past February made a profound impact on tax liability and the list of changes may be helpful for you.

A few of the new, allowable income tax deductions for 2008 include:

• Mortgage debt forgiveness in the event of a short sale
• An additional standard deduction on real estate taxes paid
• $8,000 tax credit for homes bought since January 1, 2009

TurboTax offers 4 tax filing choices online, ranging in price from $100 to free.  If you’re among the 27 million yet to file, choose whichever program fits best — just choose it before April 15.

Filing could take several hours.  Plan accordingly.

With mortgage rates are hovering near all-time lows, lots of Americans are taking advantage of refinance and home buying opportunities.

The downside of today’s unexpectedly-low rates, though, is that mortgage lenders are ill-equipped for the rush of new business.

As a result, the process of underwriting and approving new mortgage applications is taking some conforming lenders as long as 2 months to complete.

This is double the time needed as recently as six months ago.

Because there may be 60 days between the application date and the closing date, it’s important for applicants to remember that mortgage approvals can be revoked at any time prior to funding.

As mortgage applicants, there are many events that are out of our control — job security and health matters, for example.  But there are also events that are within our control.

Knowing that mortgage approvals can be fragile, here are 8 things you should absolutely not do while your home loan is in process.  It may be the difference between being approved by the bank, and being turned down.

1. Don’t buy a new car or trade-up to a bigger lease.
2. Don’t quit your job to change industries
3. Don’t switch from a salaried job to a heavily-commissioned job
4. Don’t transfer large sums of money between bank accounts
5. Don’t forget to pay your bills — even the ones in dispute
6. Don’t open new credit cards — even if you’re getting 20% off
7. Don’t accept a cash gift without filing the proper “gift” paperwork
8. Don’t make random, undocumented deposits into your bank account

Now, avoiding these items may not be practical for everyone.  For example, if your car lease is expiring and you need a larger vehicle, it doesn’t mean you can’t buy the car — just check with your loan officer first to be sure the new payments won’t “break” your approval.

The same goes for accepting cash gifts from parents.  There’s a right way and a wrong way to accept gifts and doing it the wrong way may prevent you from using the gift as a source of down payment.

Mortgage lending is full of “gotchas” and with underwriting times stretching to 60 days, it’s a lot more likely that a mortgage applicant will trip into one.  Following these 8 rules, though, is a good start.

With the official start of Spring came the official start of Spring Cleaning Season nationwide.

In some homes, Spring Cleaning is an annual ritual, tackled within one sweat-filled, rubber-gloved weekend.  In other homes, it’s a less serious endeavor.

Either way, it helps to have a game plan.

Courtesy of Martha Stewart’s website, the Spring Cleaning Organizer is a 9-step checklist covering all of the basics.

• Clean shades and windows
• Sort through wardrobes
• Clean and rotate mattresses and cushions

Most of the checklist items can be retired with household cleansers and vacuums.  A few, however, require heavy-duty appliances that you may not have at-home.  For example, cleaning carpets and rugs is best-handled with a steam cleaner; and, washing windows may be too dangerous, depending on your home.

If you don’t want to rent cleaning equipment from your local hardware store just for Spring Cleaning, consider hiring an Angie’s List contractor to do the job for you.  It will cost more money than doing it yourself, but the job will get done right (and your home will be clean).

The Spring Cleaning checklist also reminds homeowners to check the batteries of in-home safety devices like smoke alarms, carbon monoxide detectors, and flashlights.

(Image courtesy: Junk Bee Gone)

The national housing market got three pieces of good news in 3 days last week:

• Monday: Existing Home Sales up
• Tuesday: Home values appear higher nationally
• Wednesday: New Home Sales up

And although national real estate statistics are irrelevant to the local markets in which real estate transactions happen, to a country of would-be and wanna-be home buyers, repeated positive news on housing can be a strong signal that it’s time to get off the sidelines.

At least, that’s what the data is showing us. According to an industry trade group, first-time home buyers accounted for half of all sales of previously-owned homes.

The stimulus package’s $8,000 tax credit likely played a role in this 50 percent figure, as well as sagging home prices in most markets and low mortgage rates nationwide. In Philadelphia’s very affordable market, where price declines have been truly nominal compared to those in many parts of the country, these first time buyers are seeing even more benefit from the program, and our company is seeing many people acting now to take advantage of the incentive.

But lest we carried away, we can’t forget that February’s New Home Sales is still the second-lowest tally on record and that two months of data doesn’t define “turnaround”.

On the other hand, if the trend continues through the Spring Buying Season, we’ll likely look back at Winter 2009 as the low point in housing. Since it has been my experience that we only recognize the end of any difficult period in retrospect, these indicators gain more significance in my mind.

(Image courtesy: LA Times)

If you’re in want of a cash out refinance, the most liberal cash-out program in town is about to make qualification more difficult.

Effective April 1, 2009, the FHA is reducing the maximum loan-to-value on cash-out refinances by 10 percent, dropping the loan size limit from 95% of the home’s value to 85%.

In its official press release, the FHA says it’s making the change to “limit its exposure to undue risk”.

It also lists the following cash-out requirements:

• With less than 12 months since the purchase date, a home’s value cannot exceed its original purchase price — even if home improvements were made.
• A homeowner must be current on his mortgage payments to qualify
• A second, verifying appraisal may be necessary, depending on loan traits
• Co-signers may not be added to the mortgage note in order to qualify

The last day to register a FHA 95% cash out refinance is Tuesday, March 31, 2009.  The loan does not need to be “locked” — only registered.

So, if you know that a 95% cash out FHA refinance is in your future, talk to your loan officer before Wednesday morning about registration.

In a tight economy, do-it-yourself home improvements projects not only save money, but may also justify a higher listing price for a soon-to-be home seller, and make the house stand out when buyers look at it.

In the 4-minute video above, Sweat Equity host Amy Matthews talks with NBC’s Matt Lauer about affordable home upgrades that even the least skilled home remodelers can finish on their own.

Three of the huge, bang-for-the-buck projects discussed are:

• Refinish laminate countertops for $95.
• Replace hollow “builders’ doors” with sturdy doors for $200 each.
• Install kitchen and bathroom backsplashes for $500 each.

The video also recommends installing a basement egress window, if possible. As far as DIY goes, it’s a little bit more complex but the results are stunning.