If you are planning to apply for a loan modification but haven’t calculated your debt to income ratio, it means you are not yet prepared for the loan modification procedure. A borrower’s debt-to-income ratio is one of the key essential factors, which come into play, while lenders consider a loan modification proposal. Wondering what income to debt ratio exactly is? A debt-to-income ratio, often abbreviated as DTI is nothing but the percentage of a consumer’s monthly gross income that goes toward paying debts. To calculate the borrower’s debt to income ratio, the lender generally divides the borrower’s monthly payments to creditors by his monthly gross income. If you like to opt for a debt settlement plan, a debt-to-income ratio can also help you out.
DTIs often cover more than just debts; they can include certain taxes, fees, insurance premiums, credit cards and car payments and leaves out utilities, television, phone and Internet. If the debt to income ratio is 40 percent and below, it indicates no more than 40 percent of your monthly income can be allocated to debt. While calculating this ratio, the borrower needs to provide substantial proofs of income and the information necessary to run a credit report. Read on to know the steps to estimate debt to income ratio for a loan modification.
- Determine, how much you exactly earn from all sources including secondary employment and your spouse’s wages. Make sure you use the gross total as opposed to the net. Your gross income stands for your wages before taxes and other deductions.
- Sum up your monthly payments for secured and unsecured debts. While secured debt incorporates mortgage, home equity and auto loans, unsecured debt includes credit cards, student loans and personal loans. Rule out your living expenses such as groceries, gas, utilities, insurance, cable, phone or Internet from this calculation.
- Once you divide the sum of your monthly payments by your total monthly household income and find out your income-to-debt ratio, make sure it is over 40 percent, otherwise you will find it difficult to obtain an approval from lenders for a loan modification.
- The rest of the task is a cakewalk. Fill out a modification application which requires minimum information like your name, address, social security number and date of birth. The bank generally uses this information to run a credit report and eventually uses the credit report to calculate your monthly debt.
- Last but not the least, you have to submit your loan modification application along with copies of financial information, including one month’s pay stubs, two years of W2s and two years of federal tax returns. The lender will analyze all these documents to calculate your gross monthly income, your debt-to-income ratio and finally use it to weigh and consider your modification request.
Keep the above mentioned points in mind and achieve your desired goal in the best possible way.
Author Bio: This is a guest post by Christina Jones (christina.jones60@gmail.com). She is a financial content writer associated with Oak View Law Group. She has helped a lot of debt laden people with free counseling on debt settlement services.