Mortgage Modifications and the 31% Rule

by Richard S. Feinsilver on October 2, 2010

Every day I am hearing more and more horror stories about the mortgage modification process. The most common gripes focus on the length of time that the process has been taking, and that after months and months of going back and forth with their lenders, more and more homeowners are ending up worse of than they were when they began the process.

As an outside observer of the process, I am making the following comments as a word of caution to any homeowner who is either considering a mortgage modification or is already in theprocess:

First, whether you like it or not, unless you were one of the relatively small population of homeowners with a sub-prime mortgage, these programs were not initially designed to assist you. The only reason that the banks got into the modification business on a widespread basis was the threat of their own demise and arm twisting from the government. This means that you have little or no leverage with your lender – basically you are at their mercy…

Second, before you even think about contacting your lender, I suggest that you first see if you meet the 31% rule – namely, that most bank’s rule of thumb for first mortgage payments is that a homeowner should be able to allocate 31% of their monthly gross income to their first mortgage payment. Most banks do not care about any of your other obligations and/or the size of your family. If your first mortgage payment is equal to 31% or less of your monthly gross income, I urge you not to even waste your time or set any false expectations that your mortgage can be modified by your lender.

Third, if you have an application for a mortgage modification pending, you must keep your financial information current with your lender. Again, as a rule of thumb, banks do not generally look at any financial information that is greater than 90 days old. An application for a mortgage modification is not a one-shot proposition. It is your responsibility to keep current information in front of your lender. Banks are looking for ways not to approve a modification and lack of current information is the most common reason that modifications are denied.

This posting is not intended to discourage you. I simply am providing some insight so you can best manage the modification process.

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