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How to Present Your Income and Expenses for a Loan Modification

How to Present Your Income and Expenses for a Loan Modification

How to Present Your Income and Expenses for a Loan Modification 150 150 The Law Office of Nadia K. Kilburn

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If you’re applying for a loan modification, you have to provide your income and expenses. Sounds straightforward, but it’s often not. It’s easy to get denied by simply filling out the financial forms incorrectly.

It would make things easy if your lender simply told you how to present your financials in order to get approved, but they don’t do that. It’s the exact opposite. At most they simply tell you what documents they need. The worst case scenario is that you give them what they asked for, and then they deny your modification, even though you would have been approved, if you had a little guidance.

Let’s go over exactly what you need to know.

In general, a successful loan modification application will show the bank that you are:

  • Not at risk of defaulting again – banks don’t like giving people loan modifications only to have them default immediately after resolving the matter.
  • Capable of comfortably resuming regular mortgage payments – banks like to see that you have enough money left over each month to provide for emergency expenses without defaulting on your mortgage.
  • Not making so much money that you could afford to just reinstate your loan in full – if the bank sees that you have a large surplus of income every month, they may not want to work with you to figure out a solution. They may just ask you to pay the amount you owe in full or (at a minimum) pay a large lump sum payment as part of your modification .

7 Tips to Help You Present Your Income and Expenses Correctly

  1. Report an accurate monthly average of what you earn.
  2. While it sounds straightforward to tell the bank how much money you make, sometimes pay stubs fluctuate – especially if you are paid in a way that is impacted by short months or long months.
  3. For example, if you are paid twice a month – during a shorter month, you may earn less than you would during a longer month. So, when reporting your income for a loan modification – you should be adding up all your months for the past year and then taking an average monthly income to use as your number.
  4. If you receive  bonuses or commissions on an inconsistent basis, you may end up applying for a loan modification during an unusually low or unusually high income month.
  5. Make sure you are aware of this and take an average of what you earn instead of reporting a too high or too low month.
  6. Report “normal” expenses using the IRS National Standards.
  7. When applying for a loan modification, only spend money on standard household expenses that are necessary to live like:
    • Utilities
    • Phone / Internet / Cable
    • Food
    • Clothing
    • Childcare
    • Automobile Expenses
  8. Your lender will make you provide 60-days of current bank statements so they can get an idea regarding how you prioritize your expenses.
  9. If you want to know whether you’re spending too much or too little in these areas, check out the National Standards published by the IRS – the lenders use these standards to show what is “reasonable” per household size.
  10. Avoid spending money on things like:
    • Casino charges
    • Luxury items like boats, RVs and discretionary travel
    • Eating out / restaurant charges
    • High entertainment charges
    • High amounts of political contributions
    • High amounts of tithe or charity contributions
  11. Create a front-end debt to income ratio that is 31% – 33% (or lower).
  12. The ratio of your mortgage payment to your monthly income is called your “front-end” debt to income ratio.
  13. Once you’ve determined what your monthly income is, make sure that your mortgage payment is around 31% (or lower) of your monthly income. A mortgage payment that is much higher than 31% of the monthly income may cause problems, as lenders have determined that a stable household should only be spending about 31% of the monthly income on the mortgage payment.
  14. Create a back-end debt to income ratio that doesn’t exceed 50% – 60%.
  15. The ratio of ALL your household expenses INCLUDING your mortgage payment is referred to as your “back-end” debt to income ratio.
  16. Once you’ve determined what your monthly income is, add up all your expenses including your mortgage payment to ensure that your total debt to income ratio doesn’t exceed 50% – 60%.
  17. Lenders like to see that there is some money left over every month after all expenses have been paid – this shows the lender that it’s possible for you to cover unforeseen expenses without defaulting on your mortgage.
  18. Factor in expenses that will show on your credit report even if there isn’t a line item on the lender’s application form for you to report these expenses.
  19. The bank pulls your credit report as part of the loan modification process. The minimum monthly payments for all open accounts showing on your credit report will be added automatically by your lender to your  list of household expenses.
  20. If you created perfect debt to income ratios using the expense sheet provided by your lender but forgot that you have more things you’re paying on, the additional expenses could create problems with your debt to income ratios because the lender will add these to your review as soon as they see them on your credit report.
  21. Don’t assume that the bank will disregard an expense owed on your credit report just because you’re not actively making payments on it.
  22. If you have a credit card that went to collections and you haven’t been paying on it for a year or so, you may not feel like the minimum monthly payment on that credit card is not an expense in the true sense of the word because you’re not sending any money toward this expense each month.
  23. The lender doesn’t view it that way. The lender will see the open account on your credit report and they will count it as an expense even if you’re not actively paying on it.
  24. Don’t show the bank that you have a large surplus of income left over every month (if the surplus isn’t accurate).
  25. If your total debt to income ratio is very low – meaning, if you submit an application that shows a ton of money coming in every month and very few expenses going out, you may still get approved for a loan modification but the bank may require you to make a large lump sum payment toward your arrears as part of the offer.
  26. The bank will see that you have plenty of money coming in every month with tons of extra cash left over and will likely want some of that extra money.
  27. If you truly DO have a surplus at the end of every month, perhaps it IS feasible for you to make a lump sum payment easily or just reinstate the loan which may be a good option for you (you should consult with an attorney if you feel like this is describing your situation).
  28. If you’re having trouble coming up with enough expenses on the lender’s application form, use a more detailed household expense sheet even if the bank didn’t expressly ask for one.
  29. A common issue that causes problems for borrowers is that the expense page within the loan modification application provided by the lender doesn’t ask you about ALL your expenses – they just ask for a few general ones.
  30. If your lender’s application only has a few spots for expenses and you know you have more legitimate expenses (and the inclusion of more expenses will help you) use a more detailed expense form and send this form in with your application.

What to do if your expenses are too high

  • Eliminate all discretionary expenses. Reduce all expenses related to entertainment, eating out, vacations, travel etc. and spend money only on the bare minimum living expenses.
  • Wait to apply until you’ve paid off some debt (if you have time). Figure out how close you are to a foreclosure sale date and then wait to apply until you have paid off some of your other debt.
  • Raise the household income. This will help your debt to income ratio. While it can be hard to just “raise the income” some people try the strategies below:
    • Renting a room in your house to someone who can pay you regular monthly rent.
    • Start collecting a monthly contribution from adult children who live in your home.
  • File for bankruptcy before you submit your modification application. Consult with a bankruptcy attorney to see if it’s better for you to file a bankruptcy first and then apply for a loan modification (you will definitely want to have a detailed conversation with an attorney about this one before you come to this conclusion on your own).

What to do if your expenses are too low and your income surplus is too high

  • Start making larger than the minimum due payment on any credit cards. Banks will understand why you are choosing to make large payments toward your credit card debt and will think this is a good thing to do.
  • Use a more detailed household expense sheet than the one your lender gives you. You likely have more expenses than you think and you certainly have more expenses than the ones provided for by your lender on their application forms. Use a detailed expense sheet so ALL your expenses get reported.
  • Increase your retirement contributions while you apply for a modification. If you have control over your 401k and you have a large surplus of income at the end of the month, it may be the right time to contribute more to your retirement.

It can be tricky and a little bit scary to just send in your income and expense information to the bank and hope it all goes well. If you want help in figuring out how to present your income and expenses, feel free to give me a call at (425) 654-1674.

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