I CAN’T AFFORD MY PAYMENT

If you can’t afford your payment, do not panic. You are not alone. There are solutions. Help is available.

The first thing to do if you feel that you can no longer afford your payment is to figure out where you stand financially. This will involve tallying your income and expenses.

Many people panic needlessly at the first sign of financial difficulty. The best thing to do is to gain clarity about your financial situation. There are plenty of alternatives to foreclosure, ranging from refinancing or loan modifications, to short refinancing (also called a short-fi) and short sales. You’ll need to clearly understand your finances to figure out which option is best for you.

Gain Clarity in Your Finances

In order to understand how much you can afford to spend on housing, you’ll first need to figure out how much money you make per month before taxes. All mortgage calculations are based on monthly income and expenses.

Next, write down your monthly mortgage payment. Make sure to add in your income tax payment, as well as any homeowner’s insurance, homeowner’s association fees, and mortgage insurance payments.

Then calculate how much money you spend on other debts like loan and credit card payments each month. Include everything.

The next few steps will involve some calculations. Divide your total monthly debt (including your mortgage payment and any other debts) by your gross monthly income (income before taxes). The number you come up with is called a debt-to-income ratio, or DTI. The DTI is a number that shows how much of your income goes to debt. Lenders use the DTI ratio to figure out how much you can afford to borrow. This is a good way for you to determine how much of a mortgage payment you can afford.

There are two important DTI ratio calculations. The front-end DTI ratio is calculated by dividing your housing costs (including mortgage premiums, property taxes, homeowner’s insurance and homeowner’s association fees) by your gross monthly income. To get the back-end DTI ratio, add together all of your monthly payments, including your housing costs and all other monthly debt payments (including payments for credit cards, student loans, alimony and car payments). Then divide that number by your gross monthly income.

Here are a few examples of front-end and back-end DTI ratios, based on a monthly income of $5,000.

Front-End DTI ratio (mortgage payments, insurance, property taxes, homeowner association fees)

Back-end DTI ratio (all monthly debt payments including credit card, student loan and car payments)

How Do I Know What I Can Afford?

Ideally, a homeowner’s front end DTI ratio should be 31 percent or less.  When lenders renegotiate with at-risk borrowers under the Obama Affordability Plan a 31 percent front-end DTI is the goal.  On the back end, the borrower’s DTI ratio should be 38 percent or less.

I Figured Out My DTI Ratio. What’s Next?

The 31/38 DTI ratio guidelines can help you decide if you’re within range of an affordable mortgage payment. If your DTI ratios are higher than the 31/38 DTI guidelines, evaluate whether your current financial situation is temporary or permanent. Then, look through the MortgageOutreach.org site to review your options.

Remember, if you feel that you can not afford your mortgage, you are not alone and have more choices than you think.

The Obama Affordability Plan allows homeowners with a back-end debt-to-income ratio of 55 percent and higher to qualify for loan modification if they agree to debt counseling with an approved Department of Housing and Urban Development debt counselor. To find one who meets HUD standards call 1-800-569-4287.

Get proactive in educating yourself about your options. Help is available if you need it.