Since the March 4, 2009 announcement from the U.S.
Department of Treasury regarding the new Home Affordable
Modification Program, loan modifications is one
of the hot issues.
A Home Loan Modification can help you stop foreclosure
and stay in your home. For troubled homeowners,
the new Program is inspiring hope by offering the
prospect of helping them get into affordable, long-term
mortgages.
But it could affect your credit score depending
on how far behind you are and the kind of mortgage
loan modification you’ll be granted.
According to a Bloomberg report, consumers are
seeing their FICO credit scores drop after loan
modification.
Banks report the loan modifications to credit bureaus.
The adjustments can lower credit scores because
of the way the FICO score formula works.
Ethan Dornhelm, a principal scientist at FICO’s
San Rafael, California, office, told Bloomberg,
“We view an account that has been settled
or renegotiated for less than the full amount as
a negative because historically consumers on reduced
payment plans represent a greater risk.”
The Consumer Data Industry Association, which represents
credit bureaus, has guidelines for lenders to follow
when reporting loan adjustments.
Whatever changes are made as a result of a loan
modification, such as loan amount, interest rate,
term of loan or monthly payment, will appear on
a credit report. One of the known variables that
can impact credit scores – and will continue
to in the foreseeable future – is delinquent
payments.
The impact of a loan modification on a credit score
depends on the overall composition of the consumer’s
credit profile as well as how the new loan modification
credit obligation is reported.
Bloomberg reported a case that a business development
director at an information technology company in
Charlotte, North Carolina said he was shocked to
see his credit score drop to 619 from 740 after
entering the trial period for a loan adjustment.
Consumers who are considering loan workouts should
know the exact terms of their agreements, including
whether there is a permanent or temporary reduction
in the monthly payments.
Bankrate analyst McBride said, “Homeowners
need to focus on the mountain, not the molehill.
They get to stay in their homes and can always try
to repair their credit scores,” reported Bloomberg.
