Mortgage Modifications: Angels or Demons?

With mortgage modifications becoming significantly more commonplace in today’s economy, the question on many people’s minds is: How will this affect credit scores?

Until recently, it was up to the mortgage companies how to report a loan modification. Many people have decided not to proceed with a modification because they knew it would affect their credit score, even if they weren’t sure exactly how.

However, the government recently implemented a plan that creates a consistent and accurate way for government-sponsored mortgage modifications to be reported on credit reports.

Until now, lenders could report a loan modification in several ways. If the lender was feeling generous, he might report the mortgage as “paid as agreed.” This designation would not have a negative effect on the homeowner’s credit, but this type of report was not frequently issued.

Most lenders have reported modifications as partial payments, which means that even though the payments were made on time, they only represent a percentage of the actual payment due. This would have a terrible impact on the homeowner’s credit. Often the consequences would be similar to having a short sale or foreclosure on your credit report, having a detrimental effect for years.

The new reporting standards went into effect on November 1, 2009. Following orders from the Consumer Data Industry Association, lenders are now required to report them as “loan modified under a federal government plan.” At this time, any mortgages listed under this designation will not have an effect on FICO (Fair Isaac Company) credit scores.

Once there is enough data on mortgage loan modifications, FICO will be able to determine how or if it wants to qualify these designations. Because a FICO score is based on risk, the decision will be made based on whether or not having a loan modification is a risk factor.

Typically, when transitioning to a home loan modification, there is a three-month trial period. During this period, the loan will be accurately reported in terms of being on time or delinquent. Once the trial period has been successfully completed, the loan will be reported as a “loan modified under a federal government plan.”

Although loans with this designation will not be reported negatively by FICO at this time, there is still a chance that creditors will view it negatively.

At this time, there is no way to tell exactly how a loan modification will affect people’s credit. But many agencies are trying to ensure that there is as much protection as possible so that people do not have to deal with serious negative consequences when trying to modify their mortgage.

For more information on mortgages, refinancing, and government programs that may be available to you, call us at 866-590-4562!

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