How does the bank decide loan modification approval?

A lot of people don’t understand how the bank decides whether to give them a loan modification and the banks do a pretty bad job of describing the process themselves. For most banks and most loan modification programs the bank considers two to three basic questions in determining whether you are eligible for a loan modification.

First, the bank asks if your current payment is unaffordable. Second, the bank asks if they can make your payment affordable by making changes to your mortgage. And third, the bank might ask whether a loan modification will be beneficial for the investor who owns your loan. If the bank can answer yes to all three of these questions you may be offered a loan modification. In the next three videos I will explain each of these three questions in greater detail.

Some people receive loan modification denials from their bank saying that their current payment is affordable. As I just explained one of the questions that a bank usually asks in determining if you qualify for a loan modification is whether your current payment is considered unaffordable. Often the bank will not offer a loan modification if it thinks your current payment is affordable. To make this decision many banks ask whether your current payment including taxes and insurance is greater than thirty one percent of your gross monthly income. Your gross monthly income is your total income before taxes and sometimes the bank will make adjustments to your actual gross income based upon the sources of that income. If your monthly payment including taxes and insurance exceeds thirty one percent of your gross monthly income they may consider your payment unaffordable and you may be eligible for a loan modification.

For example if your gross income is $3,000 per month 31% of that number would be $930.00 per month and if your mortgage payment plus taxes and insurance exceeds that amount the payment would be considered unaffordable. In determining whether you are eligible the bank may also ask whether it can offer you an affordable payment and whether the payment is in the interest of the investor that owns the loan.

So to summarize this video to determine if your current payment is unaffordable the bank often reviews whether your current payment including taxes and insurance exceeds 31% of your gross monthly income. But there other questions that the bank also needs to review to determine your eligibility. Sometimes the bank will deny a loan modification and say that they cannot create an affordable payment by modifying the loan. To determine if it can offer you an affordable payment through a loan modification the bank will consider a number of steps determined by the loan modification program you are being reviewed for and investor restrictions on loan modification. For the most common loan modification program, the bank will usually ask whether it can reduce your total monthly payment to 31% of your gross monthly income meaning your pre-tax income. The total monthly payment will include the monthly payment you need to pay off the amount you owe on your loan over the modified term of the loan plus monthly taxes and insurance costs. The bank will determine the total amount you owe by adding the amount you owed when you fell behind plus any interest and costs that have been charged to the bank while you were behind. The bank will then see if it can reduce your total monthly payment to 31% of your gross monthly income by temporarily reducing your loans’ annual interest rate to as low as 2%. If your payment is still above 31% of your gross monthly income the bank can extend the term of your loan up to 40 years and also forebear a portion of what you owe. A forbearance means that the bank sets aside a portion of your loan and under him the bank does not charge interest and you do not pay down the forbearance portion when you’re making your modified mortgage payments. If your previous payment was unaffordable and the bank can make your payment affordable by modifying it then you may be offered a loan modification.

To summarize this video to determine if the bank can give you an affordable payment the bank often reviews whether they can reduce your payment to 31% of your gross income by decreasing the interest rate, extending the time you have to repay your loan and forbearing some of what you owe.