If you apply for a loan modification, the servicer (on behalf of the loan owner or “investor”) will evaluate whether you can afford a lower, modified payment. As part of the analysis, the servicer sometimes looks at your front-end debt-to-income (DTI) ratio. If your current DTI ratio is too high, the servicer might deny your modification request. But if your current DTI ratio isn’t that bad and you meet other eligibility requirements, the servicer will usually take specific steps—like lowering your interest rate—to reduce your payment to a level that fits DTI ratio guidelines for a particular modification program.
Read on to get information about what a DTI ratio is, find out how to calculate your current ratio, and learn what ratio servicers typically aim for in a loan modification. (To learn how your DTI ratio affects a mortgage application, see How Do I Get the Best Deal on a Home Mortgage Loan?)
A borrower’s front-end DTI ratio is the percentage of gross (before taxes) monthly income that goes towards a mortgage payment. To find out your front-end DTI ratio, divide your total housing payment—including principal, interest, taxes, insurance, and homeowners’ association fees—by your gross monthly income. Or you can use Fannie Mae’s Debt-to-Income Calculator. (A back-end DTI ratio, on the other hand, is the ratio of all your expenses divided by your gross monthly income.)
Example. Let’s say Taylor’s gross monthly income is $5,000 per month. His mortgage payment is $1,500 per month, property taxes are $400 per month, and the homeowners’ association payment, which includes insurance, is $200 per month. Taylor’s total monthly housing expense is $1,800. His front-end DTI ratio is 42% ($2,100 divided by $5,000).
If you apply for a modification and the servicer denies your request because your front-end DTI ratio is too high, this means the servicer believes you have too many expenses—and too little income—to make payments even if you got a modification. But if your DTI ratio isn’t too high (and you otherwise qualify for a modification), the servicer will take steps to reduce your payment so that your DTI ratio will meet the guidelines for a specific modification program.
Investors set specific DTI guidelines for their loan modification programs. To lower a borrower’s monthly payment as part of a modification—and get to an acceptable DTI ratio—the servicer will normally:
For some modification programs, the front-end DTI ratio can’t be more than a specific amount, like 31%. In such a scenario, the modified house payment couldn’t be more than 31% percent of the borrower's gross monthly income.
Example. Say your current mortgage payment is $2,500. If your gross monthly income is around $4,839, a modification would have to lower your payment to $1,500 to be at a 31% DTI ratio.
DTI ratio requirements vary by investor and program. Most modification programs allow a DTI ratio of between 25% and 42%, although this is not set in stone. The investor might have flexible DTI requirements—or might not consider the DTI ratio at all—depending on the modification type and your circumstances.
If you need help applying for a modification, talk to a foreclosure lawyer or a HUD-approved housing counselor. (To get tips on when you should consider hiring an attorney to help you with a modification, see Should I Hire a Lawyer to Help With My Mortgage Modification?)