Caution: That Loan Modification Can Hurt Your Credit
A homeowner was dumbfounded to discover that his near-perfect credit score of 750 fell more than 100 points after joining a trial mortgage assistance program. And it happened despite never having fallen behind in his mortgage and even though he made the trial's payments on time.
It's a dilemma facing many homeowners seeking loan modifications, says CNNMoney. In this case it happened to a Chicago-area municipal employee who simply sought assistance after his work hours were cut.
"The ones with the most severe impact will be those with good credit of 700 or above," says Lynnette Khalfani-Cox, author of Perfect Credit: 7 Steps to a Great Credit Rating.
Khalfani-Cox says most banks will say that they notify the bureaus that you are in a loan modification program. This is basically the same as saying you're not paying as originally agreed and it marks a status change to your credit profile. "Even status changes can hurt your credit rating," Khalfani-Cox says.
But no worries, you can start to overcome the setback in six to nine months.
Most people accepted into a loan modification program are there because they have already missed payments -- in some programs you're told that you can't even qualify unless you're in arrears 90 days or more. (See our piece on what happened to a WaMu client who was told this).
Of course in such cases your credit has already dropped because credit bureaus have been notified of the delinquency. Whether or not you missed payments to get into a trial, acceptance into a loan mod will trim your credit score by 50 to 100 points -- a big impact given that the range from worst to great is from 300 to 850.
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Think of it this way: If you can't pay the minimum amount on your credit cards each month, but you pay something, the bank still penalizes you by way of finance charges and reporting you to the credit bureaus as delinquent on full minimum payments.
It's no different with a loan mod.
Here's how entering a loan modification program hurts your score: Industry guidelines call for loan-servicing companies to report your status to the credit bureaus as either current in your payments or by citing the number of days you are delinquent. In addition, your account will also be flagged with a code when you are in a partial-payment plan. The code can affect credit scores all by itself under the FICO system.
Just getting approved for a loan modification requires a credit check. Although the credit hit can be disheartening, experts say it beats the ding you might encounter if your home went into foreclosure.
I know those words don't soothe the ears of homeowners who say they had near-perfect credit prior to asking for assistance, but stop your whining. Help doesn't come without setbacks, and this one is easily fixed.
Seriously delinquent borrowers, may improve their status once they start making payments again, according to the Mortgage Bankers Association. Even though most negatives stay on your report for 7 years, their impact lessens over time, says Steven Katz, senior director of consumer education for TransUnion, one of the three credit reporting agencies. Six to nine months of handling your credit obligations in a responsible manner can have a big impact on how a lender views your creditworthiness.
Here's how, suggests Katz:
- - Pay bills on time every month, even if you can only pay the minimum amount due.
- - Keep applications for new credit to a minimum, particularly over a short period.
- - Keep credit card balances at less than 35 percent of their limit.
- - Check your three credit reports frequently (at a site like truecredit.com or zendough.com) to ensure that they accurately reflect the credit you've earned.