Carlsbad, CA–We’ve been scouring rumors, prophesies and commentary everywhere, trying to get an advance handle on Obama’s loan modification program that was released this morning.
And which says:
- The home must be an owner occupied, single family 1-4 unit property (including condominium, cooperative, and manufactured home affixed to a foundation and treated as real property under state law).
- The home must be a primary residence (verified with tax return, credit report, and other documentation such as a utility bill).
- The home may not be investor-owned.
- The home may not be vacant or condemned.
- Borrowers in bankruptcy are not automatically eliminated from consideration for a modification.
- Borrowers in active litigation regarding the mortgage loan can qualify for a modification without waiving their legal rights.
- First lien loans must have an unpaid principal balance (prior to capitalization of arrearages) equal to or less than:
o -1 Unit: $729,750
o -2 Units: $934,20
- The mortgage to be modified must have been originated on or before January 1, 2009–and will be available until 12.31.2012.
And the loaded question: Just how much of the original loan can be modified?
In mortgage underwriting talk, lenders will first have to reduce payments of mortgages to no greater than 38% Front-End-Debt-to Income (DTI) ratio. Then, the US Treasury will match further reductions in monthly payments dollar-for-dollar with the lender/investor, down to a 31% Front-End DTI ratio for the borrower.
In plain and simple speak, the Front-End DTI is arrived at by dividing one’s primary housing expense by income. Lenders generally like to see a front end ratio of 28% or less. The back-end Debt-to-income ratio combines almost all monthly debt (or at least what shows up on credit reports) and divides that by monthly income. A ratio of 38% or less is preferred for back end DTI’s.
Finally: What if the front end ratios are 50 percent or more? Will lenders be willing to drop the principal balance of the loan or its terms to bring down the ratios to the required 38% Front-End DTI to make the loan modification work?
Still searching for answers….