Mortgage Loan Modification - Fixes for Common Credit Problems

Homeowners with financial trouble wanting to refinance their mortgages to better rates may be pleased to know there are still options out there for them. There are strategies available to help overcome challenges such as inadequate income, excessive debt, negative equity or poor credit.

Inadequate income and excessive debt are two sides to the same coin. Lenders consider a borrower's Debt to Income (DTI) ratio.to make sure that a borrower can pay back the loan. If you've suffered a loss of income, overstated your income on your original loan application, are self-employed or have taken on additional debts, you're most likely to be among the many homeowners who face this type of problem. You can change this ratio by earning more money with a second job, or, by paying down other debts such as credit card or other consumer debts. When you are in the process of getting or refinancing a loan, do not borrow more money as this can damage your DTI ratio. Lenders normally look for a DTI ratio no greater than 38%.

Negative equity means that you owe more on your house than it is worth. Lenders consider your loan to value ratio (LTV). Most lenders require an 80% LTV. You can try to lower the amount of your loan through a lump-sum payment, or by gradually making extra principal payments.

You can use funds from a savings or retirement account, sale of another asset, income tax refund or bonus to make your lump sum payment. You can also achieve a gradual reduction in principal by making bi-weekly payments or by making extra payments to principal. If you are going to make extra principal payments, you must indicate that the payment is to be applied to principal by writing that instruction on your check. Most mortgage agreements provide that unless you specify that a payment is for principal, it will be first applied to interest.

If your mortgage is insured by the Federal Housing Administration, or FHA, you might be able to qualify for a so-called "streamlined" refinance that doesn't require an appraisal. Mortgage insurance, which protects the lender from loss if you default on your loan, also may be a way to overcome insufficient equity.

If you have a second loan and the lender refuses to subordinate, you might want to combine both of your loans into one new loan. If you obtained your second loan through the same lender as your first and as part of your purchase-money financing, you may be in a better position to combine the two loans than if you obtained your second loan later on. In that case, you'll be subject to more strict guidelines because your refinance will be considered a cash-out, rather than a conventional rate-and-term refinance.