How to do a Loan Modification Yourself for FREE!

Self Qualification:

#1 DTI (Debt-to-Income):

First things first, do a Financial Statement / Budget Worksheet (see attached or call your lender’s loss mitigation / loan modification department and request their loan modification package.) You are going to want to fill this out so you can calculate your DTI now. This will save you a lot of time up front and will enable you to make a decision as to whether you should do a short sale or attempt to do a loan modification. If you get denied you can always do a short sale as your backup plan to prevent foreclosure.

You want to make sure your DTI is not too high or not too low but, just right. Banks ideally want everyone to be at 32%. If you are already close or less than that they most likely won’t do anything. If you are way too high 70%+ then they most likely won’t do anything because they will think you’re a lost cause.

Housing Ratio or Front End DTI is mortgage payments, taxes, insurance, mortgage insurance, and HOA.

So on the attached example:

$2,645.49(1st)+$500(taxes)+$873.24(2nd)+$50(insurance)=$4,068.73

Divide the $4,068.73 into your gross income. i.e. $4,134.30 / $8,076.94 equals a 50% housing ratio or front end DTI. (Which is perfect!) We want it to be between 50-70% now and end up at 32-40% after the modification.

Then take all your other expenses it is asking for. i.e. gas/elect, car, child care, gas, food, etc. and add that to the housing expenses. You will then get your backend DTI.

For example $4,068.73+$2,372.29(other exp)=$6,441.02 divided into gross of $8,076.94 = 79% DTI

So in this example your DTI would be 50/79 (50 over 79) (50 front end and 79% back end or total DTI)

It is always a good idea to do everything off of gross income as well as net income (take home). When you illustrate both out on the financial worksheet it leaves little guesswork by the bank and makes things a little clearer. 100% Backend DTI based on NET Income shows that you have no disposable income and something must change.

DTI Summary:

If your housing ratio is already at 40% or less your lender will most likely say “sorry this is not our problem…the problem is because of your rental properties, your credit cards etc.” Solution = Short Sale Rental Properties and look into Debt Management Options for the unsecured debt. If those are not an option look into CH. 7 Bankruptcy.

If your housing ratio is 70%+ then they are most likely going to say “you are in a house you can’t afford and we need to get you out of the McMansion and into something that you can afford.” Solution = Short Sale Property and look into Debt Management Options for the unsecured debt. If those are not an option look into CH. 7 Bankruptcy.

If you are in an option arm aka negative amortization loan, the lender most likely cannot and will not give you a 1% modification. If the lender were to grant a modification for a fixed rate of 5-6% see if your housing ratio would stay under 40%. You can calculate your new payment here. If you can’t even afford the payment at 1% or if you will not be able to afford the higher fixed rate. You either abused the product or got slammed into it. Solution = Stay in the home and continue to make payments. 3-6 months before the loan recasts list your home for sale with a short sale expert and look into Debt Management Options for the unsecured debt.

By the way, another way you can lower your payment is to lower your property taxes. Here is the link to apply for a reassessment in San Diego. Don’t pay anyone for this service just find your counties property tax website online through a Google search and DIY.

#2 LTV (Loan-to-Value)

OK if you passed the first test in qualification move on to the second test, LTV. Does the lender have any collateral left? In other words, are you upside down? While this is not the most important qualification it is important to see if the lender has more incentive to foreclose on you or keep you on the hamster-wheel. Zillow seems to be pretty accurate lately to check your value.

If you want to get really analytical you can calculate what the lenders losses will be and illustrate to them that giving you a modification or approving you for a short sale will save them X.

#3 Adjustable Rate or a Fixed Rate Higher than 7%

We all know that we are going to have to pay back China someday and to do so we are going to have to hike interest rates. I hope you got a chance to read The Wall Street Journal’s article titled: “Official Sees Aggressive Rate Boosts in the Offing” In my opinion rates are going to go up quick especially if we come close to defaulting on one of our interest payments.

#4 Hardship

It is not necessary to go late on your payments in order to obtain a loan modification. If you are late it does however prove your hardship. Hardships can be any or all of the following: family emergency (medical, divorce, death, tragedy), increase in expenses (child, economy, etc) and/or decrease in income (layoff, loss of job, loss of overtime, loss of tips, economy). I recommend putting your outcome in your hardship letter so it is clear as to what will work for you.

We are all meant to grow, when we feel as though we are in limbo we can get stressed. We don’t sleep until we experience enough pain or enough pleasure to take action and do something about it. Like the old story about Cecil. Cecil was a hound-dog that laid down on the porch of a gas station in a small town in Texas, passer-byers would ask “why is Cecil always howling” and the gas station attendant would always reply, in his Texas accent “well, ya know, Cecil’s like most Americans, he sitting on a nail and too lazy to get up.” Knowing the next step in your life gives you that growth and freedom. If you are late one thing that helps is knowing your timeline. Most American’s believe if they are one month late the sheriff going to knock on the door the next day.

I hope this post helps educate you on the options that are available to you.

WARNING: Do not pay an upfront fee to  loan modification SCAM. You can do it yourself for FREE!

This post has been dedicated to all of the loan mod scams out there and to putting you out of business for good!