How to write the contribution letter for a loan modification
Once you’ve identified whether the income you want to use is contributor income, you need to present it correctly to the bank so the income gets included on your application.
1. Show that the income is consistent
Banks like to see that the contributor is giving you the same amount of money each month.
If you have an agreement with your contributor where they cover specific bills or groceries such that the amount they give you fluctuates each month, you need to standardize the contribution for the duration of time that you’re working on your modification.
Explain what’s going on to your contributor and create an agreement with the contributor where they will pay you one consistent amount each month.
Then, after your modification is done, you can resume the original method of having them cover individual items or bills.
2. Show proof of the contributor income
You can’t just say “I receive $500 per month from a household contributor” and expect the bank to believe you without proof.
Without proof of the income, your lender will disregard this income and remove it from your application.
So, you have to prove that you actually receive this income.
It’s totally fine for your contributor to give you cash every month – just make sure you deposit the cash in full, as soon as you receive it, before you spend it to create proof that you’re receiving the funds.
3. Report the contributor income correctly on the application
Every loan modification request will require you to complete an application at the beginning of the process.
Some applications have a spot listed in the income section marked “contributor income.” Other applications have their own separate form designated for you to report contributor income.
Some applications have no form or no spot to include contributor income.
If there is nowhere to write-in “contributor income” – there will be a line item on the application in the income section that says “other income.” Use this spot to write the amount of the contributor’s income. Next to the word “other,” write the word “contributor” so the bank knows what type of income you’re reporting in this section.
4. Submit letters of declaration confirming the contributor income
To avoid delays with your review, in addition to reporting the contributor income on your application, submit the two following letters:
- A letter stating the name of the household contributor, the amount they contribute every month, and where the contribution is deposited. Sign this letter yourself.
- A letter FROM the contributor confirming the amount they pay per month signed by the contributor.
Note: Depending on who your bank is, they may have their own form that they want signed by the contributor detailing their contribution.
5. Make sure the contributor income helps your chances of approval
If you’re someone who receives contributor income in cash every month AND you haven’t been depositing it into your bank account, you have some discretion as to whether you want to include the income or not.
What you’re deciding here is whether this income will actually help you get approved. When applying for a loan modification, you’re trying to demonstrate to the bank that you have enough income to support resuming mortgage payments again without being at risk of future default.
The general rule is that banks like to see your mortgage payment at about 33% of your overall monthly income. Lenders believe that if you’re only spending 33% of your monthly income on your mortgage payment, you have enough money left over to cover other outstanding expenses.
So, if your mortgage payment is taking up much more than 33% of your monthly income, adding your contributor income will help show the bank that you have enough income coming in to support your mortgage payment.
Conversely, if your wage income or other type of regular income already puts you in a position where your front end debt to income ratio is 33% or so, unless you have massive amounts of other debt that the bank will see – you may want to consider ending the monthly contributions from your contributor and not reporting the income as it may look like you have too much money coming into the household.
This is a complicated decision to make that requires you to weigh many factors, so if this describes your situation, I would recommend reaching out to an attorney for help evaluating whether you should present the income.
6. Watch out for the bank making the contributor a co-borrower
From time to time, upon approval of your loan modification, the bank tries to include the contributor as a borrower on your loan modification documents. This happens very rarely but it does happen.
If this happens to you, I strongly recommend you consult with an attorney as soon as possible. Attaching anyone to your home as a borrower has legal implications for you and for them so be careful about this.
7. Ask whether the contributor needs to live in the home
Some banks/investors require contributors to be household members in order for their income to count toward the household income, but this isn’t necessarily the case all the time.
Ask your bank directly before you submit your application whether your investor has a requirement that the contributor live in the home so you know what to expect.
8. Make sure you know if the contributor will have their credit score checked
Investors have varying degrees of requirements for contributors. Some banks want more information from the contributor beyond just proof of their contribution. Sometimes, they pull their credit score in order to determine whether the contributor is a reliable source of income for the household.
Before you submit your contributor income – ask your bank if they plan to pull your contributor’s credit score and then prepare your contributor for this so they’re not surprised.
If you are about to start the loan modification process, are struggling in the middle of the process, or if you just want to chat about your income sources to get a full understanding of how you should be presenting your income, give me a call at (425) 654-1674.