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Homeowners Cautioned About Effects of Loan Modification on Credit Score

By Sally Maison
Published: Saturday, January 2nd, 2010

Many homeowners have recently been denied of vehicle and card loans because they had their home loan modified. They initially thought avoiding a foreclosure would save them from any hit on their credit score, but they are not aware that a modification would make it difficult for them to acquire a new line of credit.

Homeowners Cautioned About Effects of Loan Modification on Credit ScoreThe economic recession and housing meltdown left many consumers in a very tight financial squeeze. Lenders tried to make their situation better by offering trial home loan modifications to 700,000 consumers across the country. Last November, 31,000 decided to make their modification permanent. Experts warned, however, that consumers trying to avoid foreclosure will still see their credit ratings drop because of loan modification.

Industry specialists explained that its impact on a credit score could vary depending on the lender, a borrower’s credit history, how the loan was modified, and when it was altered. Belleville, MI resident James Sperrs, said he was not told upfront of the consequences of a modification when he applied for a trial modification through Bank of America. The bank cut his monthly payment from $1,140 to $957 but it damaged his credit score by more than 50 points.

What hurts their credit rating more is that their creditor reported them as late with their payments even if Sperrs has always been current with their mortgage. They were only given the assurance that their creditor will correct errors once the new loan is finalized.

Like the Sperrs, consumers who can no longer meet their loan payments may ask their lenders to change their payment terms by decreasing monthly payments and lengthening payment duration. However, homeowners who recently had their loan terms altered were mostly unaware of its damage on their credit score. Some said their ratings dropped by as much as one hundred points.

Financial counselor Julie Bos, explained that the impact of a loan modification on a credit score depends on how a mortgage company reports it to the bureaus.

Payments reported as “partial” will naturally hurt a rating. Homeowners who remain current on their mortgage, but decided to modify their loan because of a wage cut or job loss are expected to take bigger hits on their credit rating.

Many consumers believe that they can already apply for new loans once their mortgage is modified. However, homeowners whose credit score suffered greatly are very likely to be rejected by creditors. Those who plan to get a car in two months may need better luck in getting one. Or they may have to bring a higher down payment or a cosigner along so they will get approved.

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