Mortgage Modifications:Angels or Devils?
As a former psychology major, finding solutions to resolve people’s problems has always been a subject of interest to me. I hope that my writing will give people the confidence to make decisions about FHA loans. For information about any mortgage related topic, please visit www.fhamortgagebank.com.
With mortgage modifications becoming a significantly more commonplace in today’s economy, the question on a lot of people’s minds is: How will this affect credit scores?
Up until recently, it was up to the mortgage companies how they chose to report a loan modification. Several people have decided not to proceed with a modification because they knew that it would affect their credit score, even if they weren’t sure exactly how.
Recently, though, the government has implemented a plan that creates a consistent and accurate way for government sponsored mortgage modifications to be reported on credit reports.
Until now, lenders could report a loan modification in various ways. If the lender was feeling generous, they could report the mortgage as “paid as agreed.” This designation would have no negative effect on the home owner’s credit, but this type of reporting did not occur often.
Most lenders have been reporting modifications as partial payments, meaning that although the payments were made on time, they were only a percentage of the actual payment due. This would have a terrible impact on home owner’s credit. Often, the consequences would be similar to having a short sale or foreclosure listed on their credit report, which has a detrimental effect for years.
The new reporting standards are effective as of November 1, 2009. Following orders from the Consumer Data Industry Association, lenders must now report these as “loan modified under a federal government plan.” For the time being, any mortgage listed under this designation will not have an effect on FICO (Fair Isaac Company) credit scores.
Once there is enough data on mortgage loan modifications, FICO will be able to establish how or if they wish to rate these designations. Because a FICO score is based upon risk, the decision will be made based upon whether or not having a loan modification is a risk factor.
Usually, when transitioning to a mortgage modification, there is a three month trial period. During this period, the loan will be reported accurately in terms of being on time or delinquent. Once the trial period has been successfully completed, the loan will then switch to reporting as “loan modified under a federal government plan.”
Although loans with this designation are not going to be reported adversely by FICO at this time, there is still a possibility that creditors will look at it negatively.
At this point in time, there is no way to discern how exactly a loan modification will affect people’s credit. But many agencies are trying to ensure that there is as much protection as possible so that people do not have to deal with severe negative consequences while trying to modify their mortgage.
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