Mortgage Modifications And Credit Scores


The general consensus is that a mortgage modification, while it may help you to get your finances back in order and it may help you to save your house, it may also make your credit score crash.

However, apparently that depends upon how your lender chooses to report the modification. (Would that just be the luck of the draw?)

If your lender modified the loan and forgave 10% of the balance owed but chose not to report that loss as a ?charge-off? then your score may only dip 10 to 30 points. But if they choose to report it as a charge-off you could see your scores plummet by as much as 100 points. Apparently, and as always, you are at their mercy.

If a lender does what is called a ?recapitalization?, which is putting the delinquent payments and fees into a new balance with a lower interest rate, you may see your scores modestly increase.

But if your lender does not grant a modification (rumor has it that many modifications are not going through but who really knows?) or if you choose not to pursue a modification and you are forced to do a ?short sale?, foreclosure or bankruptcy your scores will go down dramatically.

A ?short sale? is when you find a buyer for your home and the lender agrees to settle the balance of your mortgage for less than what you owe. It actually seems rather unfair that you are penalized on your credit score for a short sale because a short sale is completely market-driven. If your home was worth what you owed then of course, you would sell it for that. The problem is not really you but rather the depressed real estate market, where homes values have declined to such as extent that you can?t sell it for what you owe on it. Even if you could find a buyer at the higher price, they better be able to pay cash because they won?t be able to find financing for it themselves, because the house will not appraise at that value. With a short sale you are losing money just like your lender is losing money. And most folks don?t have $30,000.00, $40,000.00 or more just sitting around to pay off a mortgage when they sell a house. The premise when you purchased the home was that when you sold it the proceeds from the sale would pay off the mortgage. How is it possible that an individual could have predicted the housing crash and paid less to begin with? When home prices were high, you couldn?t have paid that much less.

But none of that matters, if you do a short sale your credit score plummets.

But not as much as a foreclosure, which is worse, or a bankruptcy, which is even worse than that.

Right now, with the current housing crisis, as far as your credit score is concerned, you?re damned if you do and you?re damned if you don?t.

Check out this article, Urgent Mortgage Moves Need Not Destroy Credit Scores.