Q. A borrower has a debt-to-income ratio (DTI) of 80% and a current housing ratio of 60% (ratio of housing payment to income). If the borrower is eligible for a Chapter 7 bankruptcy, would filing the Chapter 7 help in getting a modification?
A. If you had been tried this before the 2008 crisis, your answer would have been unquestionably YES. However for FDIC, HAMP and GSE published guidelines the answer is NO.
Pre crisis, underwriting was done based on logic. However in today’s world of automation, there is no pre or post modification eligibility criteria in regards to DTI. For the guidelines above, the only requirement is that borrowers with high DTIs must agree to post-modification counseling.
However, there are a few proprietary modifications, especially small lenders, who still underwrite based on logic. But today they are the exception not the rule.
So following the pre-crisis model, and filing bankruptcy to eliminate debt actually eliminates the only hardship one might have, which is excessive debt.
We will discussing this scenario as well as many other real-world situations in our upcoming Loan Modification Boot Camp, October 17 – 19, 2014. You can read about it here.