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The 31% Rule in Loan Modifications

First announced in 2009, the Home Affordable Modification Program  is still a mystery to many Californian homeowners who may be facing foreclosure. Loan servicers of the HAMP program modify existing mortgages on the basis of what is popularly called “the 31 percent rule”.

This condition is that homeowners must be delinquent or in danger of defaulting and they must also spend more than 31 percent of their income on monthly housing costs.

This idea behind this percentage is also what is known as “front-end DTI” (debt-to-income) The goals of the program, as outlined by Congress, are to keep the front-end debt-to-income target of 31%. This only accounts for the first mortgage. So, if you owe other loans against your home, you account for those separately as part of what is called you back-end DTI.

If your income is already below this threshold then it can be stated that your mortgage payment really isn’t the cause of financial hardship. From the loan servicer’s perspective, if you have other debts - student loan, car payments, and credit card payments - you should take it upon yourself to work directly with those creditors to reduce their payments and/or relieve you of some of the debt.

So How Can You Tell If Your Mortgage is Within The 31% Benchmark? By following the following guidelines you can easily prepare for your HAMP loan request with your loan servicer. Doing your due diligence can save you a lot of time and disappointment.

  1. Collect pay stubs, business invoices and other income documents to determine how much money your household makes each month. For self-employed individuals, you might be required to submit your most recent tax return statements.
  2. Write down your pre-tax income. Don’t include the amount of money you take home after taxes and other deductions.
  3. Multiply your pre-tax income by 0.31 (31%). The result you get is the maximum amount the government thinks you should spend on your mortgage payment—including the cost of insurance and property tax.

Are you planning to apply for a HAMP loan? Would you like help preparing your documents? FAIR Counselors offer help to homeowners facing foreclosure and offer a number of services to help you avoid foreclosure and restore financial stability. Contact us at: 310-321-1234

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