Manage Your Other Debt Prior to a Loan Modification


The Obama Affordability Plan offers financial incentives to mortgage lenders to modify home loans until the Housing to Income Ratio (HTI) is down to 31% of a homeowner’s gross monthly income. As might be expected many people facing mortgage difficulty are stretched thinly on all their other lines of credit. How is a lender supposed to help you handle your mortgage if another third of your income is taken up by servicing other debt? The only way borrowers can get a loan modification under the Obama Plan is if they get their total Debt to Income Ratio, DTI down to less than 55%. If you’re not covered by the plan, you might need to get it as low as 40%.

To see what your DTI is, tally all your debt service payments including those for credit cards, personal loans, and automobiles. Add in your housing expenses like mortgage, home equity line of credit, insurance, and homeowners association dues but group them separately so that you can look at your HTI. When you’ve added up all your monthly liabilities, divide that total by your monthly income. This produces your DTI. If it’s more than 55% you need to get it lower. At 55%, you’ll only qualify for the Obama plan, with debt counseling.

To fully explore your options you’ll need to take a look at your credit reports and learn your FICO credit score. You can get a free reports each year from each of the three major credit agencies, Experian, Equifax and Trans Union from AnnualCreditReport.com. Make sure that the information is accurate. You have the right to dispute anything, but need to prove your point.  You are not entitled to a free annual copy of your FICO score, but can purchase it fromMyFico.com.

If you’re credit is still good , and you are not underwater on your mortgage, see if you can get either a home equity line of credit to pay off your credit cards. Another option is  cash out refinancing which would cover all of your consumer debt along with a new, low interest, fixed rate mortgage. For a car payment, you might be able to refinance with a different lender with lower interest. If you can get a low interest credit card at an introductory rate, do so. Transfer as much as possible from high interest cards, but note when the rate on your new card resets.  You might also be able to get a debt consolidation loan from a peer to peer lending site like Prosper.com.

Unfortunately, 30% of your credit score is based on how much credit you use. If you are facing mortgage difficulty there is a good chance that despite a history of on time payments your credit score has dropped. If you have fallen behind on your other payments, it’s time to look for help.

You’ve seen the ads in emails, and heard the radio and TV blaring at you. The claims are seductive. Debt settlement negotiators will secure principal forgiveness and interest rate cuts, even going so far as to pay the bills for you monthly. If you simply call the toll free number presented, you’ll be debt free in a year. Don’t believe it. The recession has given rise to scam artists who apply most of the fees you pay to their own pockets. Some sit on your fees, paying your creditors late, lowering your FICO score. The worse don’t pay your creditors at all.

If you need consumer debt counseling, the most reputable source for a referral is the National Foundation for Credit Counseling. Its nonprofit affiliates are usually listed locally as Consumer Credit Counseling Services. Almost all offer a free initial consultation. These groups are adept at negotiating lower interest rates and payment plans for debtors in trouble. In most cases they can also secure late fee forgiveness and forestall any action from credit agencies because they use the prospect of your bankruptcy as leverage. They can even handle your payments, after setting up a mandatory electronic funds transfer from your account each month. Much of the counseling services’ fees are paid by the lenders themselves, which return a portion of the debtors’ payments to the agencies.

If you decide on credit counseling, be sure to check out the agency thoroughly with your local Better Business Bureau. Don’t pay a big upfront fee. Treat anything over $50 as a red flag.  If the promises offered seem to good to be true, be wary. Legitimate firms are affiliated with either the aforementioned National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Be sure to ask the agency when your payments will actually reach your creditors. You don’t want to be late with a single payment.

Once you’re on a debt settlement plan, stick with it. Now that a new monthly payment is in place for the rest of your consumer debt, you can approach your mortgage lender with a fixed number that will encourage your loan servicer to work with you on reaching the Obama Plan’s 31% HTI.


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