Blindsided by a Credit ‘Hit’

Just when loan modifications look to be the possible ‘silver-bullet’ to ward off foreclosure and credit damage, we now find out that they can adversely affect credit scores.

Even borrowers who have worked diligently to maintain good credit can be ‘dinged’ by a loan modification. “A modification temporarily reduces the monthly payment, which can be helpful if someone’s dealing with a pay cut. Typically, the principal amount owed on the loan is not reduced or changed and the amount of debt owed is not forgiven.” So what’s the point of additional credit damage?

Inconsistencies in credit reporting and the manner in which modified payments are viewed by the lender are part of the problem. Although there appears to be no ‘rhyme-or-reason’ to which lenders choose to report the modification as a negative credit event, the one apparently safe avenue these days is the Government’s Making Home Affordable program. Modifications created under this program are listed as ‘modified under a federal plan’ and appear to be exempt from negative credit reporting. If you are interested in finding out more about this program Mark and I are hosting a free workshop on February 11 (see blog sidebar for more information).

Even though a loan modifications affect on one’s credit is far less damaging than a short-sale or foreclosure, borrowers considering this option should speak with a nonprofit credit counselor before proceeding.

Some information for this post from an article in the Detroit Free Press, distributed via RISMedia