Do mortgage modifications affect credit score?
Do mortgage modifications affect credit score?
Loan modifications may or may not affect your credit score. Generally it is believed that a loan modification will have a positive impact on a borrower’s credit score. In case, if the lender has reduced the principle amount of your loan, it will also help you in reducing your debts. Also, if you pay off your debts on time after the loan modification for the next 6 to 12 months, your credit rating will start improving.
However, after the loan modification, if you’re late on your payments or start making partial payments, your credit score will get negatively affected. In addition, the lender would report the principle reduction as “debt satisfied for less than the full amount”. This will also have a negative impact on your credit score.
In certain cases, the lenders would not accept your loan modification request if you’re not delinquent on your mortgage payments. You may have to show that you are 30 days late on your payments. If the lender reports this 30 day late payment to the credit bureaus, your credit score can go down by few points.
President Obama’s Making Home Affordable Mortgage Modification also has similar downsides. If you accept this plan, the lenders will report the modification to the credit bureaus which may sharply reduce your FICO score though you are current on your mortgage payments. In addition, it would lead to higher interest rates on credit cards. Moreover, your credit limit can also get reduced.
Most borrowers, however, are not concerned about the drop in their credit score. A loan modification would rather help them in saving quite a lot of money. The main concern here is that neither the banks nor the government is making sure that consumers are aware of the credit rating impacts of a loan modification.
August 12th, 2009 at 1:50 am
It’s true that lot of people taking part in the mortgage modification program are unaware of the its credit impacts. I think the lenders should inform the consumers about the impacts of modification while they are encouraging them for the same. Thus, in case of late payments or partial payments, the consumer will not be shocked if his/her credit is affected.
August 28th, 2009 at 5:36 am
Suppose a bank puts someone on a 6 month partial payment plan for, say, half of one’s payment, and a balloon is due at the end of the 6 months to make the loan “full” again; Will that (greatly) affect one’s credit score during the 6 months, or only if they don’t make the balloon AFTER the 6 months?
August 29th, 2009 at 2:15 am
I suppose it would depend upon the lender as to how he would report the payments. If he reports your payments as “partial”, then it would definitely lower your credit score by some points.
January 29th, 2010 at 12:10 am
Great reading material. I’ve learned a lot by reading here. Thanks!