The 31% Solution for Mortgage Modification

When I first got a place of my own, I was told that a week of income should cover my housing expenses. Today, the US Department of Housing and Urban Development, HUD, estimates that 12 million households in the country now spend more than 50% of their annual income on housing.They face shortfalls on other necessities like transportation, health, clothing and food.

A key part of the Obama Home Affordability Modification Program (HMP) is bringing the housing burden down to a reasonable level. To see where you stand, add up your income from all sources, including investments and child support. Then tally your housing-related bills including your mortgage payment, property taxes, homeowner’s insurance, private mortgage and flood insurance, as well as any condominium or homeowner association fees. If your combined monthly housing expense total is more than 31%  of your gross monthly income, you could qualify for home loan modification under the Obama Plan.  This ratio of housing-related expenses to your gross income is referred to as your Housing-To-Income ratio or HTI.

Once a lender modifies a home loan so that the monthly payments equal 38% of a homeowner’s income, the government now has $75 billion dollars allocated to match your lender’s reduction dollar for dollar to get your housing cost down to 31% of your monthly gross income. By definition, the higher your HTI is currently above the 31% level, the bigger the reduction in your mortgage payment will need to be to bring it down to that 31% HTI level.  Remember, the HMP only works directly with conforming loans backed by Freddie Mac or Fannie Mae.

Even if you don’t qualify directly for the Obama plan, in the course of seeking a loan modification from your lender, you can use the 31% solution as an equitable goal. Work with your lender to achieve it by exploring all possible options including reducing the interest rate, stretching out the term of the loan or convincing your lender to forgive a portion of the mortgage principal.

Remember, you are seeking a reasonable solution to your mortgage payment difficultly, not looking for a free ride. With a loan modification, you’ve got one chance to make it work. Assemble your needed documents. Write a compelling hardship letter. Remind your lender that under HUD guidelines at 31%, you are still officially defined as being “cost burdened” by housing. You’ll still have to scrimp on non-essentials, but are prepared to do so. By seeking a reduction of housing costs to 31% of your gross income, you are drawing on government precedent for a compromise with your lender that should prove viable for both parties.

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