Trial Loan Modifications May Hurt Credit Scores
Banks and other lenders have been doing lots of foot dragging since the beginning of the foreclosure crisis. But now they are being more aggressively urged by government regulators to do loan modifications for homeowners, as the Obama Administration presses lenders to do more to stop foreclosures. One of the programs involves doing a trial loan modification. Loan modification is a process that gives the borrower more lenient and flexible terms for repaying their debt. A typical loan modification might result in lower monthly payments, for example, or a cheaper interest rate or longer repayment period.
During a trial loan modification phase the homeowner is given a chance to prove that they can make payments in a timely fashion. They are awaiting a real loan modification, in other words, and are going through a trial period during which the lender will determine how well they perform. If they do their part the lender will proceed with a more permanent modification once the probationary phase is over.
Many people already have wrecked credit when they enter into a trial loan modification, but some still have good credit. The problem is that some of these people with decent credit risk losing their valuable FICO score rating because once they agree to do a trial loan modification the lender notifies the credit rating agencies, which then penalize the borrower with a lower FICO score.
A code is placed on the credit report – indicating that the homeowner is only making partial payments. Of course partial payments may be part of the agreed upon plan that is negotiated between the lender and the borrower, but credit reports do not really discriminate. They just deduct points, and some homeowners have seen their scores drop by as much as 100 points during a trial loan modification period, according to data compiled by the Treasury Department.
The bottom line is that even an experimental or trial period loan modification can damage your credit, so if you are able to resolve your mortgage payment problems without resorting to modification it may be best for you. Otherwise you could wind up with a low credit score, and those with lower scores have a harder time getting loans – which can make things go from bad to worse during a financial crisis.
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