Mortgage Relief Program Qualifications: What Is the Acceptable Debt Ratio to Qualify for a Loan Mod?

August 15th, 2011 | Posted in Debt Relief

One of the most important factors in determining borrower mortgage relief program qualifications for loan modification is debt ratio. Debt ratio is a percentage calculated by dividing monthly debt by gross monthly income. The lender generally requires a 38% maximum debt ratio in order to qualify. For the purposes of debt ratio calculation, gross income is defined as monthly wages plus guaranteed commissions or bonuses, alimony, and other income received such as income on rental properties.

Self-employed or commissioned borrowers will usually have to provide proof of claimed income for the past two years. Part-time income may also be considered in the debt ratio calculation if the income has been earned for at least two years and is expected to continue. Once gross monthly income is determined, that amount is multiplied times .38 to get the maximum amount of monthly debt allowed for qualifying.

Monthly debt includes all payments made for automobile loans or leases, installment loans, alimony, child support, student loans, legal judgments, and the minimum payment required on credit cards. It does not include debt that will be paid off within the next ten months. Monthly debt does not include insurance payments, utility payments, or any other household expense such as gasoline, food, clothing, or other supplies. Once the monthly debt is determined, subtract that total from the amount derived by multiplying gross income by .38. The difference between the two is the maximum amount of monthly mortgage payment for which the borrower is qualified.

The homeowner has no assets they can draw from to maintain mortgage payments. There are two types of short sale agreements — ‘deficiency judgment’ and ‘payment in full without pursuit of any deficiency judgment’. The first requires the homeowner to pay the difference between the short sale and original amount. For instance, if the mortgage note balance is $150,000 and the short sale price is $125,000, the seller would be responsible for paying the remaining $25,000 to the lender. If the seller is unable to promptly pay the difference, a judgment is issued for the amount due. This judgment is reported to credit bureaus and will remain on the homeowner’s credit report for 7 to 10 years; even once it is paid in full. Additionally, the deficiency amount may be subject to income tax.

Final Tip: By researching and comparing the best loan modification companies in the market, you will be able to determine the one that meets your specific financial situation, plus the cheaper and quicker options available. However, it is advisable going with a trusted and reputable stop foreclosure specialist before making any decision, this way you will save time through specialized advise coming from a seasoned loan mods advisor and money by getting better results in a shorter span of time. Meaning getting your house out of risk as soon as possible.

Learn more about Obama Mortgage Relief Plan Qualifications.