New Guidelines Affect Loan Modifications and Credit Scores

New Guidelines Affect Loan Modifications and Credit Scores

Starting November 1, 2009, borrowers can have a little more assurance when it comes to loan modifications and how they impact credit scores negatively.

Previously, the effects of a loan modification on one’s credit score was something of a mystery. Some banks would not report late or partial payments to the credit bureaus during the trial modification process while others would. This led to confusion among borrowers, leaving many afraid of further damaging their credit with a loan modification.

Thanks to new guidelines set forth by the Consumer Data Industry Association, loan modifications under federal programs Making Homes Affordable and the Home Affordable Modification Program are to be listed on credit reports as, “loan modified under a federal plan”. This notification on the credit report will not have the same negative impact previous entries such as “partial payment” have had. In many instances, a report of a partial payment during the trial loan modification period could drop a borrower’s credit score as much as 100 points.

For the time being, FICO has agreed to take no action on these new entries… yet. Instead the credit reporting agency plans on studying the long term outcome of these loans and then making an appropriate score assessment based on the success rate of modified loans. As it stands now, banks are supposed to report the loan as current if the borrower is current on their normal mortgage payment and is current through their trial. However, if a homeowner is behind on their payments as they begin the trial process, their late entries on their credit report will not be expunged.  When the permanent loan modification is approved and implemented that is when their loan will be brought current, but the late that are currently on the credit report will continue to report on the credit report.

It is important to note that these new guidelines only apply to loan modifications under the umbrellas of the federal loan modification programs MHA and HAMP. Individual bank loan modifications do not qualify and the banks will report to the credit agencies based on their specific policies. In addition, even if the borrower’s credit score is not affected by the “loan modified under a federal plan” entry will still be visible on a borrower’s credit report, which may affect a lender’s decision somewhere down the line.

Ultimately, the decision still rests with the homeowner on how to proceed with their specific situation. While a loan modification may or may not have an impact on credit reports, the impact of a foreclosure or short sale on credit scores will most likely be far more severe.

Finally, FICO will wait one year in order to gather data on this new ruling to see if they will retroactively decide to report negatively on the borrower’s credit report.  This of course will be an across the board decision.  And yes, they will retroactively ding your credit if they decide that is the appropriate course of action.  However, any creditor that pulls your credit will still see some type of term listed on the credit referencing a loan modification.  This means the new creditor will be aware of the modification, which may impact their decision.

If you would like more information on loan modifications, short sales, or refinancing, feel free to visit our website at www.CallALMS.com. We have live chat, informative blogs and pages of information designed to help you with your specific financial situation.