Loan Modifications May Be The Road to Bad Credit
With the increasing number of home owners losing their jobs, getting a reduction in wages or hours, and facing rising costs on fuel, utilities, and goods, many are finding that they’re short on cash and unable to meet monthly financial obligations.
Home owners that are finding themselves in a situation where it is becoming hard to make mortgage payments are trying to work with their lenders to get a home loan modification. However, these home owners are not aware that home loan modifications can devastate their credit.
A home loan modification is simply a change in the terms of a loan. Typically, it is a change made to the interest rate, where the rate is temporarily reduced to lower the monthly payments. The principal amount owed on the loan is not reduced or changed and the amount of debt owed is not forgiven.
A friend of mine modified his loan for three-months and never missed a payment. He checked his credit a couple months later and discovered that his lender was reporting that he was behind on payments, but they never even hinted that their reporting would change. I doubt he, or anyone in a similar situation, would ruin their credit for a lower interest rate, the program is misleading.
A home loan modification in itself is not a bad thing and it is often a big help to the borrower. However, the way lenders report loan modifications to credit bureaus can potentially do a great deal of damage to the borrower’s credit. This is because loan modifications are reported as partial payments according to the Consumer Data Industry Association.
This “partial payment” record on your credit can cause your score to take a severe hit. The reasoning behind the partial payment recording is that it is assumed that if you take out a home loan modification, you can’t afford to make the payments on your current loan. This isn’t always the case; many are modifying their home loan to take advantage of the lower monthly payments or to lock in an interest rate. These people are trying to avoid future dilemmas, they can afford their payments.
Some borrowers that have modified their home loans aren’t even aware of the damage to their credit score until they’re turned down for a loan months later, or they get some kind of notice letting them know that one or more of their credit card accounts has been closed. Under the government’s loan modification program, a lender is required to report the payment so that it is in compliance with the Credit Data Industry Association’s rules. I’d argue that in some cases, the loan modification does more bad than good, and could in fact keep the borrower in a rutt.
How many of these borrowers are going to pay more to borrow money in the future? How many will lose badly needed credit lines?
Home loan modifications can help make your monthly payments more affordable, but that can often be at the cost of a good credit score due to the way lenders report your payments. What’s the lesson you ask? – Don’t get a loan modification unless you absolutely must.
I was shocked when I first heard that these loan modification programs can damage a home owner’s credit score. Aren’t these programs supposed to help keep people in their home? I’m sure some owner’s are working to avoid foreclosure to protect their credit, if their credit gets ruined, these owners won’t have a reason to stay in their home, and many may choose foreclosure.
See Also:
Mortgage modification may be credit downer – www.bankrate.com
Loan Modification Pros & Cons – www.suite101.com
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It is definitely important to read all of the terms of a mortgage modification. Unfortunately people who seek loan mods are often in financial distress, and they have few or no real choices. Sure, the loan modification can harm a credit score, but not nearly as much as a short sale or a foreclosure. But always beware of predatory lending practices, especially when in financial hardship.
.-= San Diego Homes´s last blog ..Extend Home Buyer Tax Credit! =-.
This is a prime example of the importance of reading the fine print in any financial document. Since these “partial payments” are damaging to a homeowner’s credit report, they make elect to forego the loan modification and make adjustments in their budget elsewhere.
Loan companies should be required to make full disclosure regarding how the modified payments will be reported to the credit agencies. However, as always, the homeowner should beware.
.-= Augusta Real Estate´s last blog ..All Brick 4 BR 2 BA In Columbia County =-.
It’s always a backside of the coin. Nothing to good comes without something bad. The bank system is built that way. Read always every fine print in any bank document.
@San Diego Homes – nice point about financial distress, people don’t always do what they should when they’re in distress
@Augusta Real Estate – making adjustments in other areas is exactly what could be done in many cases. If they have good credit, they could shuffle some things around to make financial obligations easier. The hyped mortgage modification just seems like the way to go.
@Sundream Estate – nice point and very true – nothing too good comes without something bad. Similar to “there’s no free lunch”
I just don’t get these banks. It only benefits them to work with these people and not have an overload of homes they have to sell for a loss. They seem to be cutting off their nose to spite their face.
I agree with San Diego Homes…loan mods will do mush less damage to your credit than a short sale and even worse a foreclosure.
Obama knows everyone is having hard times now. It shouldn’t reflected on anyone’s credit if they were to get a modification. I think that is very wrong. People trying to get out of the hole.Still be left there after they report that shit to their credit. Everyone should write to him or post notes to his email about that. How he knows its ruff now, but not helping out like he said by messing peoples credit up just to get lower payment. WRONG
@Matt – I agree with you both! Unfortunately, the modifications aren’t doing much to help avoid foreclosures/short sales. I think the re-default rate was up near or above 50%. Apparently the modifications weren’t enough.
@Shaunda – thanks for stopping by. The modification is just misleading, that’s really it. I think they should be more upfront with the negative effects it can have on credit. Do you know his email? I’d like to shoot him a few emails about other things
Sundream has it right. I don’t see people not being effected by loan modification. Only banks and big business can make huge financial mistakes and walk away from them scott free.
.-= Chas@Las Vegas Real Estate´s last blog ..First Time Home Buyer Tax Credit Extended =-.
What these credit companies do on the back-end is not right. Your friend simply modified his loan with no idea that adverse consequences awaited him. This system needs more checks and balances!
.-= Richard@How To Videos´s last blog ..How To Get A Small Business Loan =-.
I find it amazing that quite a few Realtors do not let their clients know the complete picture when it comes to loan mods. You also see the same thing happening with short sales. Every client should be given the pro’s and con’s so they can make an informed decision.
.-= Hopkinton MA Real Estate´s last blog ..Testing a Massachusetts Well When Buying a Home =-.
With loans there is always the danger of loosing your key assets that you may have put down as collateral for the loan. As a consequence of borrowing money from any financial institution chances are the organization will be breathing down your neck every time the repayments are not done on time and this is enough to drive any one crazy.
I am excited and thrilled on our newly purchased property. House really need improvement that will really break my credit…. anyways, I make sure that I have money to pay or asset to generate money for my payment before I jump into borrowing money from bank of anybody.
What’s really sad about this is that many people like seniors are already hurting for money yet they need to get a loan to cover home modifications for things like wheelchair ramps and stairlifts. They really can’t afford to take another hit on their credit score.
I requested a loan modification from my bank and finally received one after almost two years. I was running basically one payment behind when this started however I was paying.
I was talked into as modification by a chase rep. I later found out that my credit score took a huge hit after it was finally done after applying a fourth time.
The bank was reporting non payments or late payments because of the partial payments. I had my score dip so low I could not afford to refinance anywhere else. They then tacked on the difference to the end of the loan and I am back where In closing after paying on a loan for 8 years I am now in a loan where I will pay another 40 years (at a reduced interest rate and monthly payment of course) however I do not think my credit score will ever recover. I also have a second mortgage with the same bank. I feel they should have left off the difference and we go from there. I plan to pay this off as fast as I can (even if I need to get another job).
I just need to write and say one should really weight the pros and cons of a modification.