Loan Modification Can Lower Your Credit Score

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.