Posted by: Catherine | March 19, 2010

Loan Mod help can yield lower credit score

Wow, talk about insult to injury.  In this article “Credit Scores Can Drop After Getting Loan Help,” we learn that enrolling in the Obama “Making Home Affordable” program and entering a trial period of payments, can drop your credit score upwards of 100 points.  This is because once you enroll, the credit bureaus are alerted by your lender(s). 

Worse, on your score, is if you are later denied a permanent modification, as your score will drop even further.   A couple of clients who have entered this trial payment period were later denied a loan modification, and in one case at least, the bank returned all of their money paid during the trial period. Now they were hit with multiple months of missing mortgage payments.  Very quickly, it gets next to impossible to catch up for most people.  The options get narrower.  Short Sale?  Foreclosure?  Many then seek counsel from a realtor, attorney or CPA – and smartly so, each option to resolve your housing hardship can have serious, and long lasting, consequences.

So be sure to think of all the pros and cons of any of your options when experiencing a hardship in paying your mortgage.  ALL of your options can have serious implications on your credit report.  The worst thing that can happen to your credit score initially is the first miss of your mortgage payment. I’ve had clients tell me that missing just 1 payment dropped their credit score up to 75-100 points.  It just gets worse with each subsequent missing payment.  Many think that a short sale is less damaging to your credit score, and easier to recover from vs. a foreclosure.  That certainly may be for many people, but you won’t be unscathed, even in a short sale.  My guess, and antecdotal evidence from clients, is that you will recover more quickly following a short sale as you pay your obligations on time following the short sale.  But be aware and know what to expect.

Per the article, and as would probably be expected, the credit rating industry is defending the practice of the lower your credit score upon notice you are undergoing a loan modification trial:

The credit rating industry defends the practice. People who sign up for loan modifications would not be asking for help unless they were having severe money troubles, said Norm Magnuson, spokesman for the Consumer Data Industry Association, a trade group in Washington that represents the credit bureaus.

“The consumer is going into the program because they’re in a financial bind,” he said. “Other lenders would need to be aware of that.”



Catherine Myers
Contra Costa Short Sale and Foreclosure Resources

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