Lisa Schade

Broker, BS, CDPE, SFR

Loan Modification Can Lower FICO Credit Scores

By Debbie Dragon

 

Many people who are struggling to pay their mortgages and are at risk of foreclosure have begun loan modification programs. A loan modification is similar to refinancing a mortgage, but there are some major differences.

Both programs are intended to create a more affordable mortgage payment. Instead of looking for a new loan, as happens with a refinance, a loan modification simply modifies the terms of the existing mortgage and is available to homeowners whose financial situations don't allow them to refinance their mortgages.

Unfortunately, as of September 2009, a loan modification can be reported to the credit bureaus as a partial payment. Partial payments can lower a FICO credit score by 50 points or more, according to Craig Watts, a spokesman for FICO.

If you're modifying your mortgage, there's a decent chance that your credit score is already much lower than you'd like, and reducing it by another 50 points or more won't do you any favors. What's more, a partial-payment entry can remain on your credit report for future potential lenders to see for seven years.

If you're having mortgage trouble and a loan modification is your only chance to avoid foreclosure, you might not think that a lower credit score matters much in the big picture. But keep in mind that a low credit score will mean higher interest rates if you get approved for credit. Plus, your existing credit lines are likely to be reduced or cancelled altogether, landlords could refuse to rent to you based on your credit score (or demand higher up-front deposits), and even your car insurance premium can be increased due to a lower credit score.

With respect to your credit score, foreclosures, short sales and delinquent payments all remain on your record for seven years as a negative notation. If your home is costing you more than you can afford, you might want to reconsider a loan modification. While it may keep you in your home, it's going to have the same effect on your credit that a foreclosure or short sale of your home would have. It may be in your best interests to seek more affordable living accommodations so you can begin focusing your efforts on improving your overall financial situation.

For more information, visit www.creditfyi.com.

Reprinted with permission from RISMedia. ©2013. All rights reserved.

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