This article about loan modifications was passed along to me by Morgan Brown from Blown Mortgage. It’s a must read if you’re thinking about asking for a loan modification from your bank/lender.
Loan Modification Math
Too many people considering whether loan modifications are right for them or not don’t know where to start. They have no idea how to tell if they have a chance to qualify or not. With the changing laws and programs for loan modifications you certainly can’t be blamed if you’re not exactly sure if you qualify for a loan modification. In this post we’re going to give you some general guidelines on what you’ll need in order to qualify for a loan modification for your home.
Please note: these are general guidelines. Each bank has its own requirements and each situation, including yours, is unique. Contact your bank for exact requirements for loan modifications for your situation.
How do I know if I qualify for a loan modification?
The bank is trying to ascertain, once they go through the hassle of getting your loan modified, how likely it is that you’ll go delinquent on your mortgage once again. Redefault rate is a hot topic right now for good reason. The government, the banks and investors are all taking a risk in that by putting money up for loan modifications they’re hoping the foreclosure tide is stemmed. Therefore, banks want to know that when they make a modification it will stick.
This is the key step in determining whether you’ll be able to qualify for a loan modification or not. Can you stay current once your loan is modified? That’s the question – and for the banks, it’s all in the math.
So how can I figure out the math behind qualifying for a loan modification?
If you remember when you bought your home, you went through a qualification process. At one point in the process you were asked for a copy of your credit report, your income documentation and copies of any major debts that you had not listed on your credit report. The person processing your home loan calculated what is known as a debt to income ratio or DTI. This ratio determines how much of your gross monthly income (dollar amount before taxes) is consumed by your house payment and your other monthly obligations like cars, credit cards, student loans, etc.
The debt to income ratio is once again king in determining your ability to qualify for a loan modification. So it’s time to break out your calculators:
Let’s show how to calculate this via an example…
Example mortgage calculation
Say you have a $165,000 mortgage that recently adjusted from 5.25% to 9.25%. Your situation would look like this:
- Loan amount: $165,000
- Term: 30-years
- Interest rate: 5.25%
- Monthly payment: $911.14
- Loan amount: $165,000
- Term: 30-years
- Interest rate: 9.25%
- Monthly payment: $1357.41
Lets say that you’re still making that $60,000 per year and that you had total monthly expenses (not counting your mortgage) of $1,800 per month.
Your DTI prior to adjustment:
- $1,800 + $911.14 = $2,711.14 / $5,000 = 54.23%
Your DTI after adjustment:
- $1,800 + $1,357.41 = $3,157.41 / $5,000 = 63.15%
Million dollar question: What is the RIGHT DTI?
Banks have tightened what they think is an acceptable credit risk – they’ve dialed it way down. And while it varies from bank to bank, the target DTI you should be looking for in hopes of qualifying is 50%.
If you can show a DTI of 50% or less via a loan modification to a lower interest rate, you stand a good chance of qualifying for the modification.
Note: In the above example this would mean getting an interest rate reduction below the original start rate of the loan (5.25%). Reducing the loan to its original note rate of 5.25% would leave you with a DTI of 54% - which falls above the 50% rule of thumb.
How can we give ourselves a shot at qualifying for a loan modification?
- Double check our expenses for items that shouldn’t be included (such as work-related expenses)
- Call our credit card companies and ask for a reduction in monthly payments
- Reduce our utility bills by cancelling premium cable subscriptions, opting in to programs that reduce utility bills in exchange for power-flexibility in the summer, switching to a smaller trash can size, etc.
- Exclude expenses like eating out, food, clothes and discretionary expenses from your DTI
Because your monthly expenses can fluctuate quite a bit each month you want to focus on big ticket items and not rack up lots of little dings.
What if we:
- Saved $300/month by not eating out
- Cancelled a gym membership worth $100/month
- Reduced our utilities by $50/month
That would give us a DTI of: 45.22% - bingo. That’s the number we want to work with.
Finally, we’re going to report the big ticket items that are always there, but we’re going to leave off for now the variable items that we can control, such as food, etc.
If they ask for it later we’ll give it to them; but for now we want to present a case that with a new “hoped for” mortgage amount (the modified rate and monthly payment) plus our monthly expenses that we’re a good candidate for a mortgage at under 50%.
This is the number we’ll end up calculating on the monthly expense worksheet that we’ll have to prepare for the bank. You can get a free copy of a sample loan modification monthly expense worksheet that you can use to calculate your DTI.
Tip: Never lie to your bank. What we’re doing here is making an assumption that we can control variable monthly expenses through good judgment and sacrifice in order to keep our home. If we must present this information we will.
A shot at a loan modification
With a sub-50% debt to income ratio in hand you’re a good candidate for a loan modification. If you’d like more loan modification tips and strategies please join our mailing list. You’ll receive a free report just for joining: “The 10 Deadliest Loan Modification Mistakes” you must avoid at all costs. You’ll also get our free pamphlet, Loan Modifications 101.
Several folks have recently asked me, “Which condo communities in Loudoun and Fairfax County offer the best investment opportunities?” Here are my thoughts and the rationale behind them…
The best current bang for your buck on condos for rental investment opportunities in Ashburn is in the Westmaren community (Ashburn Farm) and the Lakeshore community (Ashburn Village). They’re both immediately next to shopping centers which make them very attractive for renters (and buyers). Westmaren has a lower price point than Lakeshore, but Lakeshore’s rental rates are higher. Both communities have decent condo fees and currently offer break-even to positive cash flow with 20 to 30 percent down at today’s interest rates.
The condos with the best future (6-10 year) potential are in the Summerfield community in Brambleton. The Summerfield condos are directly across Ryan Rd from Brambleton Town Center, which they’re planning on building either an underground or overhead walkway to/from. In addition, Summerfield and Brambleton are only a few miles from the future Moorefield Station and the last stop on the Dulles Metro Rail (Silver Line).
Condos with some of the greatest upside potential throughout all of Fairfax County (if not the entire Northern VA area) can be found in Reston. More specifically, condos located near one of the two future metro rail stations (coming 2013). And the metro stations themselves aren’t the only thing being built. Roads are being redesigned, new walking/biking trails are being added, new bus routes are being designed, future growth won’t impact traffic as much as it has/does now, etc. (Click here for the Wiehle Avenue/Reston Parkway Station Access Management Plan Executive Summary)
Once the metro stops are operational (if not before), you’ll see an increased demand for condos located near those stops or on one of the new arteries leading to the stops. This typically leads to an increase in rental rates and market values.
If you’re wondering just how much upside there is when metro comes to town, just look at what effect the Orange Line from Washington, DC to Ballston had on the Wilson/Clarendon Boulevard corridor in Arlington.
One thing to keep in mind…condo fees.
In Northern VA, the landlord, not the tenant, typically pays the condo fees out of their own pocket. Make sure you factor in the condo fee when crunching the numbers.
- Condo fees in Westmaren in Ashburn range from around $175 to $300 (per month); Lakeshore’s range from $240 to $350; Summerfield’s are a bit higher than both
- Condo fees in Reston very greatly from community to community and unit to unit. I can provide you with the condo fees on any community or specific condo unit upon request
If you have any questions or need further clarification on anything, don’t hesitate to contact me.
Ever since the Loudoun/Northern Virginia real estate market turned in 2005, real estate investors have not really been able to make a lot of money “flipping” homes. In fact, many lost money. This is because prices were still declining and investors ended up not making a profit and even losing money on the deal.
But that has changed.
Pockets of Loudoun County and Northern Virginia have foreclosure/bank-owned properties that are selling for well below market value - even taking into consideration the amount of work necessary to rehab the property. Real estate investors are starting to buy them up, fix them and sell them for a profit - all in as little as 2 months.
Here are two real-life examples:
1) Fannie Mae owned town home - purchased for $160,000 (net) near end of 2008 - it needed about $30K worth of rehab (retail price - less if you have a “hook up” with a contractor or do the work yourself) - sold 6 months later for $242,500 (net). Taking into consideration cost of purchase and sale, you’re still clearing about $38K, an 18.6 percent return on your investment in 6 months.
2) Wells Fargo owned town home - purchased for $140,000 (net) in February 2009 - it needed about $40K worth of rehab (retail price) - sold in April 2009 for $244,800 (net). Taking into consideration cost of purchase and sale, you’re still clearing $52K, a 27 percent return on your investment in 2 months.
There are other opportunities like these out there - you just have to do your due diligence and find them. If you’re a real estate investor looking for other “flip” or rental investment opportunities such as these, I’d be happy to help. You can contact me here.
Foreclosure, bank-owned and short-sale properties make up over half of total home sales in Loudoun County. This has been the case for some time now and will most likely continue through at least the end of 2009, if not longer.
A few things I’ve noticed…
- The percentage of foreclosure/bank-owned properties to total sales has decreased. This probably has to do with the foreclosure moratoriums that were in place from the end of 2008 to March 31 of this year.
- The percentage of short-sale properties to total sales has increased. This is due to banks becoming more willing to accept short-sales and because more sellers are trying to take the short-sale route rather than being foreclosed on.
- The increase in short-sales has left more home buyers frustrated than every before. The short-sale process is long, requires a lot of patience and has less chance for success than a foreclosure/bank-owned and traditional sale.
We should start seeing more foreclosures come on the market now that the foreclosure moratoriums have been lifted and Fannie/Freddie and other banks are back at it foreclosing on delinquent borrowers. In one way, this is a good thing because it will give home buyers more straight-forward and less stressful inventory to choose from. In another way, more foreclosures on the market could be bad because it could put downward pressure on prices. It all depends on the rate at which banks release all their foreclosure properties on to the market.
Here’s a look at Loudoun County foreclosure/bank-owned and short-sale market statistics for April 2009:
Total Sales/Buyer Demand
- The number of foreclosure/bank-owned and short-sale property sales in April 2009 were almost exactly the same as in March 2009 (325 vs 323)
- April 2009 sales were up 29 percent over April 2008
- April 2009 had 273 new foreclosure/bank-owned and short-sale listings come on the market versus 289 in March 2009, a decrease of almost 6 percent (In comparison, April 2008 saw a 23 percent increase in listings from March 2008)
- April 2009 had 273 new listings come on the market versus 360 in April 2008, a decrease of 24 percent
Buyer demand for foreclosure/bank-owned and short-sale properties has increased tremendously from last year. But the rate of new inventory/listings on the market is way down. This means more buyers competing over fewer properties which has lead to price stabilization and many multiple/competing offer situations.
If you’re a home buyer who is considering purchasing a foreclosure/bank-owned property between now and the end of summer, here are a few tips when it comes to previewing these types of properties:
- Dress light and bring a towel - many foreclosure/bank-owned properties don’t have the electricity turned on which means that the air conditioning is not on - 90+ degrees outside can equal 100+ degrees inside
- Don’t wear anything you don’t mind getting dirty - most likely, neither the previous owners nor the bank cleaned the house prior to it coming on the market
- Bring a flashlight - the electricity may be turned off so it’ll be dark in the basement area especially if it’s an inground basement
- Use the bathroom just before you head out to preview homes - the water may be turned off meaning that the toilets are not working
- Consider leaving your children with a family member/friend - the lack of air conditioning makes for extra hot temperatures inside the home which can make kids really cranky, really fast (plus no working toilets)
- Bring something to drink and some snacks - the high temperatures outside and inside the home can make you thirsty and lethargic. If you’re anything like me when you’re really thirsty or hungry, you’re brain will slow down and you won’t be able to focus
Many folks are wondering why foreclosure/bank-owned properties are still “winterized” even though it’s May. After all, winter is gone and spring is here. Well, the main two reasons banks are still “winterizing” properties is to cut carrying costs and limit potential damage to the property.
“Winterization” by definition is the process of preparing your irrigation system for winter so that the pipes don’t burst due to below-freezing temperatures. The term “winterization” in real estate has evolved to also include,
- turning off the water supply to the house
- draining all the pipes inside the home including the hot water heater
- turning off the electricity and gas supply
The bank has expanded it’s ”winterization” process to include some or all of these things for a a variety of reasons, two of them being,
- To save money by not paying utilities
- Minimize potential damage to those systems which could/would otherwise be on from the time the home was foreclosed on to when it was sold.
Not all properties are “winterized” in the above way. Countrywide for example, has the listing agent/broker put the utilities in their name prior to the property going up for sale and through settlement day. Countrywide then reimburses the listing agent/broker the cost of those utilities at a later date.
But many banks don’t follow this process and just have everything turned off. If you aren’t sure whether the property has been winterized or not, you’ll know the second you walk in the house. If it’s below or above room temperature, the lights don’t turn on and/or there’s blue tape on the sink and the toilets, it’s been “winterized”.