Until just a few months ago, most people did not know what
formula was used to qualify homeowners for a loan
modification. However, recently as the popularity of
modifications has increased, we are beginning to see
pattern of how and why loan modifications are approved. It
all boils down to the DTI (debt to income) ratio. The DTI
is the ratio of the homeowners income divided by their
monthly obligations.

The magic number is somewhere between 31%-40%. Basically,
for a loan modification to be successful, your bank will be
comparing your monthly income against your expenses. Keep
in mind that your income is represented as gross, not net.
If you can demonstrate that at the least 1/3 of your gross
monthly income is used for a living expenses (including
your housing payment), you are on your way to a successful
loan modification.

To calculate this formula, your bank will require you to
complete a monthly budget. Here you must itemize your
expenditures each month. The entries will include food,
gas, utilities, credit card payments, medical expenses,
etc. Also, you will be required to provide tax returns and
recent pay stubs to prove your income. You can experiment
with the numbers on your own before you submit them to get
an idea of your potential eligibility.

A few words of caution with regards to qualifying for this
process. Don't make the mistake of grossly
misrepresenting your monthly expenses too high in an effort
to convince the bank to significantly reduce your mortgage
payment. Although it might appear to make sense, it will
not work. If your DTI ratio is too high, the bank will
simply deny your modification. The reason for this is
because, in some cases, the bank might feel that even if
they reduce your payment it might not be enough to solve
the problem and they are only delaying the inevitable,
which is foreclosure.

You have many other options and some versatility when
preparing your financial analysis and constructing your DTI
ratio. Many times if your qualifying ratio is too high, you
can offer the bank a notarized letter from a family member
who will offer financial support. This can dramatically
improve your qualification if your income is too low.
Remember to ask these questions in the very beginning of
the process. There are several additional options to help
keep the DTI within proper range and increase the odds of
your approval.

In addition, your bank will need some other information
from you. One thing will be the hardship letter which will
explain the events leading up to your modification request.
Was it the loss of your job? Was it a reduction in income?
Maybe you have some unexpected medical bills? Basically,
you need to explain why you were able to pay the mortgage
before and why you are struggling now.

Naturally, there are other factors involved in getting
approved for a loan modification. However, they are
secondary to the DTI calculation which is the most
important element in the preparation of your case. If your
figures don't meet the bank's guidelines, your application
will be denied regardless of how strong your hardship
letter is and how well you prepared other items. You have
only one opportunity to present your case. You only have
one chance to get it right.

The bank really does want to help you but it must make
sense for them too. Although you might think its
personal, it' s more matter of fact for them. Once you
have a basic understanding of these guidelines, your
chances for a successful loan modification are greatly
improved.