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Federal Mortgage Changes Will Not Hurt Credit Score

By Sally Maison
Published: Monday, November 2nd, 2009

Fair Isaac Company (FICO) announced today that it will not yet factor loan modifications made through a federal plan. The company, which designed the most popular scoring model, says government-backed modifications will neither hurt nor help a FICO score until they have decided how to treat it. At present, lenders will be required to report those modifications in a different manner.

Federal Mortgage Changes Will Not Hurt Credit ScoreStarting today, lenders will have to follow a new plan on how they will report a loan modification made under a government plan. According to Consumer Data Industry Association, lenders will be required to report them as a “loan modified under a federal government plan.” The association of credit reporting agencies says it will keep consumers from incurring bad reputation among lenders, which could lead them to high interest rate deals and loan rejection.
Previously, creditors would report loan modifications in various ways. Some reported them as loans that were “paid as agreed” while most lenders report them as partial payment. This has a very negative impact on a FICO score and falls with the same category as a short sale or foreclosure, according to a spokesman for Fair Isaac.

Several consumers say their credit has dropped by more than a hundred points after their lenders agree to modify their loan terms. But experts say consumers would rather see their rating get hurt than carry high monthly payments which they would eventually be unable to pay.

FICO says is yet to decide on how to consider new mortgage modifications, so it will ignore the notation at present. Representatives say they will be able to make the necessary adjustments once they have already gathered a sufficient documented performance of homeowners who went through a federal modification plan.

Since FICO has not decided yet on the federal loan modification’s effect on a credit scores, consumers remain uncertain on whether to avail the plan or not.

Experts say consumers must make sure that a modification plan is government-sponsored and not just a homegrown one before negotiating with a lender. Consumers are also advised to ask their lender if they will be reported as current during the trial period, which normally lasts for thirty days. If a homeowner remains “current” on his payments, he will not be marked as a late or delinquent payer and his credit score will remain intact for the time being. More importantly, it will help him avoid losing his home through foreclosure.

If those two factors are met, consumers may choose to modify their loans in order to keep up with their payments. But experts warn them that their credit score could get hurt if FICO treats the modification negatively.

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