Trying to figure out the loan modification process is complicated-there are all kinds of new and confusing terms, procedures and requirements that most homeowners have never heard of before. The need for a lower, more affordable mortgage is what drives borrowers into this intimidating application process, but before you begin, a little knowledge about the terms you will hear could be very helpful.
First off, how do you know that a loan modification is the solution for your particular situation? This is not a one-size-fits-all type of problem. Your income, bills and home mortgage situation is unique to you. Will what your bank offers be a solution or no help at all? This is where learning what the new payment could be will be of great help-this is called your target payment and it is determined using a standard formula that you can learn.
The target payment is the goal of your loan modification. This is what the new, desired payment will be and it is arrived at by using your gross monthly income and your current loan balance. There is actually a standard formula that banks use to determine what your target payment will be, and standard methods of modification to reach that payment. If the information you submit to your bank on your financial statement fits into this formula, then there is a good chance that you will be approved for a loan workout.
So, let’s figure out what the possible target payment will be-and then you can decide if a loan modification is a solution for your situation. First, take your total household gross monthly income-even for people living in your home who are not on the loan-their contribution can count as well. Multiply that number by 31%-that is the new target payment you are shooting for. This number includes principal, interest, property taxes, homeowners insurance and any HOA dues.
Is this number affordable for you should your loan modification be approved? If so, then on to the next step. You must prepare your financial statement detailing your income and expenses for the bank to review. They will then use this information to determine if your loan can be modified using standard methods in order to reach that 31% target payment. Your debt ratio, asset ratio and other critical calculations will be used to determine this.
The loan modification process can be a bit confusing and homeowners really need to take the time to learn how to prepare their application correctly to have the best chance of approval. Sometimes just a minor adjustment to your budget can make the difference between approval or not. To make it easier, you may want to use a software program designed just for borrowers that will do all the required calculations for you automatically. Just put in your income and bills, and you will see immediately if you need to make any adjustments to your figures in order to qualify.
By John Hester