So we have all heard over and over that through loan modification they modify your mortgage payment to 31% of your gross income. I have seen many posts recently from confused homeowners who applied for a loan modification and were not offered a payment of 31% of their gross income or were just denied. There is a key factor in determining what your modified payment should be and whether you can qualify for a payment at 31% of your gross income and that factor is your principal balance. Let me take you through an example:
John owes 396,000 on his single family primary residence and recently had cut backs at work that reduced his income significantly. He is now bringing in a gross income of $3700 p/month compared to the $6300 he was bringing in previously. Now according to the 31% rule, if he makes $3700 p/month his payment should be $1147.00 right?
Wrong.
John has a principal balance of 396,000 and the absolute lowest that his lender can lower his interest rate is 2% (in most cases). If you use any free mortgage calculator online you can see that 2% of his 396,000 principal balance is a payment of $1463.69 p/month and then the taxes and insurance have to be added to that payment since through loan modification the lender is required to set up an escrow account. If John pays 420.00 p/month for taxes and insurance, then we add that to the $1463.69 and the absolute lowest payment that he would qualify for is $1883.69.
John has a new problem. If the absolute lowest payment that he can qualify for is $1883.69 and this payment is supposed to be 31% of this income then John needs to show enough income to support this payment. In other words, John needs an income of around $6,000 to be able to show that he can afford the $1883.69 and with his new reduced income this is going to be difficult.
What John needs is time. Time for his circumstances to change, time to find a better paying job or to get some of his hours back at his current job. First Source Law can deal with your lender and get you the time you need for your circumstances to improve so that you can get the loan modification that will give you a payment that you can afford. We deal with your lender so you don’t have to. We take the stress off of our clients so they can have piece of mind.
This post was written by Aubrey Feriante
