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Government Mortgage Assistance Program May Cause Credit Score Drop, But Better Than Foreclosure

By Sally Maison
Published: Monday, March 22nd, 2010

Homeowners who are doing their best in keeping up with their mortgage payments but are at risk of defaulting can sign up for the mortgage assistance program of the government.

Government Mortgage Assistance Program May Cause Credit Score Drop, But Better Than ForeclosureThe program is being offered by the Obama administration to help homeowners avoid defaulting on their payments. Unfortunately, there is a nasty side effect to the program. Homeowners who enroll in the program can see their credit scored drop by as much as a hundred points.

When homeowners enroll in the program, they go through a trial period where they make a minimum of three payments. Homeowners going through the trial period are, however finding out that their credit scores showed a drastic drop during the trial phase. The mortgage companies of the homeowners who avail of the program are actually informing the major credit bureaus that these particular homeowners are having loan payment difficulties, putting a black market on their credit reports and causing a drop in the homeowners’ credit scores.

A credit score drop can be very damaging, especially in these days of economic instability. People with low credit scores may have a hard time getting a loan or applying for credit. Not only that but, with a considerable number of employers doing credit checks on their job applicants, a drop in credit score could mean problems for finding employment.

Housing counselors are saying that the practice is unfair for homeowners and usually is an unwelcome surprise to them. Homeowners should not get penalized if they are doing their best to do what is right, some of them say. A lot of homeowners are also feeling duped and angry at a program that helps but carries such a heavy penalty.

On the other hand, the impact of the mortgage assistance program is less severe, by far than a foreclosure. A homeowner who goes through a foreclosure can very well see their credit score in absolute disarray for several years. In fact, while the current administration acknowledges the negative impact of the program on consumers’ credit scores, they are saying that a foreclosure causes “far more serious financial consequences for borrowers and their families”.

The credit rating industry is insisting that the credit score drops of people who apply for the loan modification program is only right. They defend the practice by saying that homeowners who are signing up for the program would not be doing so if they were not having serious financial problems. They say that this is something that other lenders should be aware of.

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