Monday, March 22, 2010

Credit scores can drop after getting loan help.

  • Government Sponsored Loan Modification Help can still hurt FICO credit scores. Applying for these programs sends a signal to the major credit bureaus, that the homeowner is having difficulties making payments. This in turn has an adverse effect on credit scores.

    tags: credit, scores

    • For borrowers who are making their payments on time but are on the verge of default, the Obama administration's loan modification program can reduce their credit score as much as 100 points.
    • the impact is far less severe than a foreclosure, where borrowers typically find their credit is in tatters for years. That's due to the cumulative impact of many months of missed payments and the foreclosure itself, which drags down a homeowner's' credit by 150 points or more on a scale of 300 to 850.

      To enroll in the Obama administration's $75 billion "Making Home Affordable" program, borrowers enter a trial period in which they make at least three payments. But some are finding out that their credit score takes a dive during this trial phase. It happens once their mortgage company notifies the three big credit bureaus -- Experian, Equifax and TransUnion.

      For delinquent borrowers, the damage was done when they fell behind on their loans.

      But for homeowners who are having financial troubles but managing to pay their bills, a request for a loan modification is the first sign of difficulty. And that means a sharp drop in the borrower's credit score.

      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.

Personally, I don't think there is anything wrong with lowering credit scores. In essence, these people receiving government assistance were unable to repay the amount they borrowed. It doesn't matter that their home is now worth less than they thought, they have proved unable to keep their financial commitments. That is exactly what credit bureaus are trying to track, how responsible borrowers are and how likely they are to meet their financial obligations.

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