Before Restructuring Your Mortgage Make Sure You Meet The Minimum Requirements
For obvious reasons the qualification requirements for a mortgage restructuring are quite different than those for a first time home buyer. The homeowner's attempt to restructure usually indicates some current, or recent, financial duress on the homeowner's part, who in all likelihood is trying to save their home and stop foreclosure. Understandably a lender will likely be very strict, even unforgiving, depending on the homeowner's circumstances.
Similar to a first-time home buyer, a homeowner attempting to restructure has to be able to prove they can in fact afford the new monthly payments. Unlike the first time buyer those attempting to restructure typically experience a harder time proving to the lender that even though they have recently suffered a financial set-back, they are in fact "back in the saddle" and have adequate monthly cash flow to enable them to afford what is likely to be a higher monthly mortgage payment.
It is proving to be a bit more troublesome for those with damaged credit when applying for a mortgage restructuring in recent times. Conventional loans are usually not available in this circumstance, leaving only those loans offering much higher interest rates. The caveat here is that along with the higher interest rates comes a higher monthly payment (unless the homeowner has accumulated a substantial amount of cash to buy points), which may possibly "kill the deal" if the borrower cannot prove conclusively they will be able to afford the new, higher mortgage payments.
Income requirements for restructuring are the same as that for a first time conventional mortgage loan. The maximum amount of income allocated to a mortgage payment cannot exceed 28%. As mentioned previously the difficulty comes with proving to the lender that the monthly income will be sufficient to cover the higher monthly mortgage payment.
A word of caution is in order. As tempting as it may be to inflate your income or downplay your debts and other financial commitments in order to improve your position, it is a fraudulent offence to lie about your income on a mortgage application form.
Lenders all seem to follow the same guidelines regarding employment. Regardless if the borrower has a job or is self-employed, they still have to provide the following documentation:
For all loans:
- Complete last year and the previous years signed federal tax return forms, and last year and the previous years W2 federal forms.
- Two most current pay stubs within 30 days for each borrower.
- Last three bank statements for all savings and checking accounts.
- Evidence of additional income (rental agreements, child support, alimony, military allowance).
For self-employed borrowers:
- Last year and the previous years signed federal corporate tax returns.
- Last year and the previous years signed federal partnership tax returns.
- Last year and the previous years and current (calendar or business year) year to date (YTD) signed Profit and Loss Financial Statements.
- Current year to date (calendar or business year) signed state tax return forms.
In what was an act of "too little, too late" the government stepped in and began examining some of the questionable lending tactics which started the whole sordid mess. As a consequence lenders have been forced to enact stricter loan requirements and funding obligations to negate the need for government legislation. While this strategy has provided a stop-gap measure to reduce future abuses and irresponsible actions, it offers very help to those borrowers who are struggling to avoid foreclosure and keep their homes.
Homeowners and buyers today can expect much more stringent requirements from the lenders. Credit score requirements are becoming increasingly strict. If you're looking to restructure an existing mortgage, make sure you have money for closing costs and a substantial down payment along with solid documentation of your income. And above all, don't let the clock run out on your efforts.
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