Monday, September 20, 2010

If Your Receive Untaxed Income, HAMP May Not Help You!

Home Affordable Modification Program (HAMP) Financially
Discriminates Against Recipients of Non-Taxed Income

By

P. A. Williams, “An Extremely Frustrated Homeowner”
September 20, 2010

Homeowner’s receiving non-taxed income and seeking a loan modification under the Home Affordable Modification Program (HAMP) better beware! Why? All non-taxed income, including social security income, is considered “net” income. If only “net” income is available, then the loan servicer must “gross up” or increase the borrower’s “net” income to a level equivalent to a person receiving a taxable gross income before any payroll deductions.

Example 1: A recipient of non-taxed social security income of $1,600.00/mo. has the same spending power as a worker earning $2,000.00 per month (earnings of $1,600.00 plus $400.00 for withheld for taxes) before any payroll deductions.

Example 2: To estimate the gross monthly income for the recipient of social security income, multiply $1,600.00 by 1.25, the product of which is $2,000.00 (social security income of $1,600.00 plus the 25% gross up of $400.00).

To qualify for HAMP, verified income documentation must confirm that the borrower’s monthly mortgage payment ratio prior to the modification is greater than 31 percent. The monthly mortgage payment ratio is the ratio of the borrower’s current monthly mortgage payment to the borrower’s gross monthly income of all borrowers on the mortgage note, whether or not those borrower’s reside in the property.

Example 3: If you divide a monthly mortgage payment of $1,000.00 by the borrower’s gross monthly income of $3,200.00, the monthly mortgage payment ratio would be 31 percent.

Grossing up non-taxed income such as social security income may help in determining how much home a person may qualify to buy because his or her income can be increased by 25%. Grossing up the same non-taxed income, however, may not help a person who is seeking a loan modification because increasing his or her income by 25% might falsely indicate the borrower’s ability to make the current monthly mortgage payment and a loan modification unnecessary.

Example 4: A homeowner receiving non-taxed social security income of $2,600.00 per month applies for a HAMP loan modification to lower his or her monthly mortgage payment is $1,000.00. The loan servicer multiples the homeowner’s net income of $2,600 by 1.25 (125%) and estimates the homeowner’s gross monthly income to be $3,250.00, a $650.00 increase. The loan servicer then determines whether the monthly mortgage payment ratio is equal to 31% or less. Dividing the monthly mortgage payment of $1,000.00 by the homeowner’s estimated gross monthly income of $3,250.00, the monthly mortgage payment ratio is 31%. Because the homeowner’s monthly mortgage payment ratio is equal to 31%, the homeowner would not b eligible for a HAMP loan modification.

Example 5: A homeowner receiving non-taxed social security income of $2,200.00 per month applies for a HAMP loan modification to lower his or her monthly mortgage payment is $1,000.00. The loan servicer multiples the homeowner’s net income of $2,200 by 1.25 (125%) and estimates the homeowner’s gross monthly income to be $2,750.00, a $550.00 increase. The loan servicer then determines whether the monthly mortgage payment ratio is equal to 31% or less. Dividing the monthly mortgage payment of $1,000.00 by the homeowner’s estimated gross monthly income of $2,750.00, the monthly mortgage payment ratio is equal to 46%. Because the homeowner’s monthly mortgage payment ratio is greater than 31%, the homeowner might be eligible for a HAMP loan modification.

Example 5: A homeowner receiving non-taxed social security income of $2,800.00 per month applies for a HAMP loan modification to lower his or her monthly mortgage payment is $1,000.00. The loan servicer multiples the homeowner’s net income of $2,800 by 1.25 (125%) and estimates the homeowner’s gross monthly income to be $3,500.00, a $700.00 increase. The loan servicer then determines whether the monthly mortgage payment ratio is equal to 31% or less. Dividing the monthly mortgage payment of $1,000.00 by the homeowner’s estimated gross monthly income of $3,500.00, the monthly mortgage payment ratio is equal to 29%. Because the homeowner’s monthly mortgage payment ratio is less than 31%, the homeowner would not qualify for a HAMP loan modification.

There are major differences between the worker’s gross monthly income and the recipient’s non-taxed social security income.

Example 6: The $400.00 withheld from the worker’s earnings, “are real dollars” withheld for tax purposes, can be invested, saved, spent, and potentially refundable to the worker.

Example 7: The $400.00 added to the recipient’s non-taxed social security income, “are not real dollars” but only the “value of equal spending power” between the worker’s earnings and the recipient’s non-taxed income that cannot be saved, invested, spent, withheld or potentially refunded to the homeowner.