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Understanding Back End Debt to Income Ratios for Loan Modifications

Debt to income ratios in general are exactly what they sound like, the proportion of your debt to your income.  So if you have $5 of debt and $10 of income, the debt to income ratio test would help measure this.  In our previous article you can read about the front end ratio. 

Both the front and back end ratios are crucial to understand!  You should NOT talk to your bank unless you have first done analysis of these on your own!  There are no FORMAL guidelines for the back end ratio but freeHAMPreport.com has been in the industry for years and has a staff of industry insiders composed of ex bank employees and expert mortgage processors that have come up with the following tips on how to make sure you submit in the best way possible.  You may also be interested in reading our article about disposable income and how much is recommended. 

Calculating Back End Debt to Income Ratios:

#1. Calculating Your GROSS Income:

First calculate your total GROSS monthly income.  Gross is your income before taxes are deducted i.e. if you make $2.5 a week, but when you get your paycheck at the end of the week you only get $2 because 0.50 is deducted to pay taxes then use the larger #! 

Tip: Use your most recent paystub!  For example if last year you made $52,000 but you have received a demotion, make sure that you monthly income reflects this and do not just divide $52,000 by 12. 

WARNING: The banks WILL verify this information!  There is no point in trying to overstate or understate your income because they will want W2's and paystubs if you are a W2 employee or Profit and Loss statements if you are self employed. 

#2. Calculating Total Monthly Expenses:

Total MONTHLY Mortgage Expenses = EVERYTHING THAT YOU ARE EITHER OBLIGATED TO PAY FOR OR MUST SPEND MONEY ON TO LIVE

It is recommended to go to annualcreditreport.com to get a free report (you should not need to give a credit card to receive one).  It is important to get a free credit report because the lender will!  Make sure that you are armed with the same tools that they are. 

Warning: A common mistake that people make is either over inflating their expenses to try to stress their hardship or understating certain values which may hurt them.  An example of this is not stating your car payment but then the lender pulls it up and sees it on your credit report!  This would raise a big red flag.  Another example would be leaving groceries and food BLANK or extremely low, but then the lender sees that you claim 3 dependents and it would be impossible for a family to live on that amount. 

Tip: freeHAMPreport.com offers a free budget analysis tool.  freeHAMPreprot's tool give warnings and tips as you input your expenses so that you do not have to worry about inputting something in improperly that may raise a red flag!

#3. Calculate Ratios:

Divide TOTAL Monthly Expenses by TOTAL Gross Expenses. 

This value should be less than 100%!  Anything over 100% means that you are obligated or need to pay more than you make a month and may be construed as a risky situation for a lender.  Although you would think that this would make you more eligible for a loan modification the banks see this as a potentially risky situation due to the fact that you may even default on your reduced payment. 

Automatic Services:

We highly recommend doing this on your own, but we also encourage everyone to double check your #'s online.  freeHAMPreport.com offers an amazing and free service where you can log in (commitment free, all you need is a valid email to register) and get a complete analysis, including debt to income ratios and see whether or not you are potentially eligible for mortgage payment assistance via either the Home Affordale Modification Program (HAMP) or potentially an in house lender loan modification program.  freeHAMPreport.com also will do some other complicated assesments as well to increase your chances of success. 

If you qualify the site then allows you to download a FREE lender ready package that is actually lender ready!  Be able to submit a complete package to your lender in under 15 minutes!  And get free customer service; get to talk to a knowledgeable rep LIVE or via chat.  How is freeHAMPreport.com completely FREE?  We work with sponsors and advertisers so there is no cost to you! 

freeHAMPreport.com's goal is to empower America's homeowners to allow them to Do It For Themselves, but Not By Themselves!  Although the site does not offer guarantees, if can guarantee that you would do better than if you submitted it on your own without analysis!

Check out freeHAMPreport.com today at http://freeHAMPreport.com.  you can read more interesting articles and do it yourself guides at blog.freeHAMPreport.com. 

About the Author

freeHAMPreport.com offers a revolutionary new software for users to check potential eligibility for Federal mortgage payment assistance via the Federal Home Affordable Modification Program (HAMP) and also lender in house loan modification programs.  In under 15 minutes users can register without any commitment or credit card, complete a short questionnaire and receive a FREE lender ready package in seconds!  The report includes detailed analysis and pre populates the appropriate lender forms so users can submit for a loan modification with ease and for FREE.

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