In light of the recent economic turmoil and housing bust, mortgage modification has proved helpful in allowing people to stay in their homes and prevent foreclosure, by restructuring the terms of their existing mortgages. But buyer beware, there are certain implications for your credit score that come along with the process.
Choosing to enter a mortgage modification program is often out of necessity. However, certain credit criteria still must be met in order to gain approval. Mortgage modification may be an option for those who are ineligible to refinance, are facing long-term financial hardship, have fallen behind on payments, or will soon. It’s a potential catch-22 if delinquent payments have already been recorded, since chances are your credit score has already gone through the ringer, you may not qualify.
What Is A Mortgage Modification?
A mortgage modification alters the terms of your existing home loan. Potential changes include adding any past due charges to your principal balance, or changing the loan type from an adjustable rate mortgage (ARM) to a fixed rate.
The process can be tedious, but the end result can resolve your delinquency status, make your monthly payments more affordable and allow you to stay in your home and avoid foreclosure. Plus, in comparison a modification does less damage to your credit score than foreclosure.
Upon examination of your paperwork the lender may decide to do a trial modification. Trial modifications are common and in some cases, a required prerequisite to getting permanent modification. Trials usually last six months and give the lender time to collect hardship verification documents.
Potential Credit Issues
The primary way modifications can affect your credit score comes from how lenders report to credit bureaus that you have entered a modification plan. During the trial period mortgage companies may report your lowered monthly payments to credit bureaus as “partial payments” or “rolling 30-day late payments”, since you are not paying the original amount and the modification has not yet been made permanent.
Depending on your status prior to entering the modification (delinquent or current) the ramifications for your credit score will differ, but according to the Treasury Department, those who were current on their mortgages could see their scores fall up to 100 points. On the contrary, entering modification could benefit seriously delinquent borrowers’ credit scores, as it means resuming payment. Also note, once the modification has been made permanent, lenders will generally report your status to the credit bureaus as “current”.
Talk to Your Lender
Currently, there is no law against reporting payments as partial during the trial period. Speak with your lender about how they report payment history during modifications before entering the agreement.
Mortgage modifications represent a practical solution to help people afford their homes and avoid foreclosure; however they do pose risks of their own. Discuss your options with a mortgage professional to decide what’s best for you.