How Will a Loan Modification Affect Your Credit Score?
As homeowners continue to default on their mortgage obligations, and try to reorganize their finances the need to work their lenders has become increasingly important.
As I have discussed in the past in this blog, loan modifications are not a new fad, or President Obama's great new invention, but rather a tried and true tactic known as negotiation.
With this said, many homeowners are concerned though as to what will the impact be on their credit score should they opt for a HAMP or traditional mortgage modification or credit workout.
According to an article by Moe Bedard, on September 29, 2010, "a recent VantageScore Solutions survey using more than 400,000 active, anonymous consumer credit files shows that mortgage modification options have very little effect on [credit] scores.
" In order to forecast a consumer's projected credit score, it has been suggested that a crystal ball and tarot cards may be in order.
This suggestion though is a bit far fetched, even for the ever difficult, but not completely unpredictable FICO score rating.
With respect to the contention that one's credit score will decrease with a loan modification, which is a very dangerous statement to make.
Not only is it likely that credit scores may not be impacted in a significant way by loan modification, but they may save a homeowner's house.
The reason credit scores are not affected much may in fact be rather simple.
Approximately 35% of your credit score is based upon the amount of debt.
If you enter into a loan modification, the amount of debt is not generally altered in any way and in some cases, under the HAMP program, very small amounts of principal may even be set aside, up to $83 per month.
Another approximately 35% of the FICO score is based upon your payment history.
If a homeowner was behind on making payments and enters into a loan modification, and their new payment history is reported, then a credit score can only improve.
Now, it is true that some mortgage servicers do not report during a loan modification or even report a late payment if the payment is not set up properly, however, for the most part, homeowners' credit should not be affected in a manor that should come into play when considering a loan modification.
I want to add a note of caution though to anyone trying to workout a deal with their bank.
As we have seen all too often, many investors are offering temporary or even full blown modifications only to withdraw their offer down the road.
With that said, in many situations, a bankruptcy, may be a better option to allow a consumer to catch up on their arrears.
As with any complex legal situation, it is advisable to consult with a bankruptcy lawyer in your area.
As I have discussed in the past in this blog, loan modifications are not a new fad, or President Obama's great new invention, but rather a tried and true tactic known as negotiation.
With this said, many homeowners are concerned though as to what will the impact be on their credit score should they opt for a HAMP or traditional mortgage modification or credit workout.
According to an article by Moe Bedard, on September 29, 2010, "a recent VantageScore Solutions survey using more than 400,000 active, anonymous consumer credit files shows that mortgage modification options have very little effect on [credit] scores.
" In order to forecast a consumer's projected credit score, it has been suggested that a crystal ball and tarot cards may be in order.
This suggestion though is a bit far fetched, even for the ever difficult, but not completely unpredictable FICO score rating.
With respect to the contention that one's credit score will decrease with a loan modification, which is a very dangerous statement to make.
Not only is it likely that credit scores may not be impacted in a significant way by loan modification, but they may save a homeowner's house.
The reason credit scores are not affected much may in fact be rather simple.
Approximately 35% of your credit score is based upon the amount of debt.
If you enter into a loan modification, the amount of debt is not generally altered in any way and in some cases, under the HAMP program, very small amounts of principal may even be set aside, up to $83 per month.
Another approximately 35% of the FICO score is based upon your payment history.
If a homeowner was behind on making payments and enters into a loan modification, and their new payment history is reported, then a credit score can only improve.
Now, it is true that some mortgage servicers do not report during a loan modification or even report a late payment if the payment is not set up properly, however, for the most part, homeowners' credit should not be affected in a manor that should come into play when considering a loan modification.
I want to add a note of caution though to anyone trying to workout a deal with their bank.
As we have seen all too often, many investors are offering temporary or even full blown modifications only to withdraw their offer down the road.
With that said, in many situations, a bankruptcy, may be a better option to allow a consumer to catch up on their arrears.
As with any complex legal situation, it is advisable to consult with a bankruptcy lawyer in your area.