I recently read an article (link posted below) that evoked an OMG! out of me (not an easy thing to do). It has come to my attention that modifying your mortgage will, in the short term (the duration of the trial mod) and possibly for the long term, cause a dip in your FICO score. Whether its a dip or a drop depends on a few things and what will the consequences be.
It turns out that homeowners who apply for modification will see their credit scores go down. If their credit is already shot, their score may only dip a little more. If their score has been good, the modification can cause their score to drop as much as 100 points. Wow, that is a significant drop. This will mostly affect the homeowner who is struggling but has managed to keep it together. They've been told that they should consider a loan mod to help them get through this hard period in their life.
What happens is that the trial loan modifications are only partial payments of the actual loan. This being the case, the bank reports this to the credit bureaus as being behind on your payments and thus your score takes a nose dive. If your mod takes 10 months then it shows up as 10 months behind on your payments.
Now the banks have said that when the homeowner completes the trial and finalizes the modification, they will remove the delinquncies from the credit report. The homeowner's credit score is suppose to recover ( it takes about 30 days). Will this really happen the way the banks are proclaiming? Too soon to tell. This is all very new and the banks are overwhelmed. Out of the hundreds of thousands loan mods being done and requested, only about 175,000 have gone to final modification. That's a drop in the bucket.
Let's hope that scores go back, but in the meantime, homeowners are going months with poor credit. What are the consequences? Other creditors that they have dealing with, ie Visa, American Express,their home equity line, may notice the decline in score and the deliquent payments and decide that this person is too much of a risk. They may lower his spending limit, up his rates, or even cancel him. If the homeowner is applying for a new job and the potential employer checks the credit score (and yes many of them do), they may find the homeowner a riskier candidate. If the homeowner is applying for a car loan or college loan for his son/daughter, these may get declined. This list could go on and on.
We can't give legel advice or accounting advice, but I think it is our job to at least warn potential homeowners, who may not really need to do a modification, that they should think the route they take very carefully and perhaps even seek credit counseling before making a final decision.
http://finance.yahoo.com/news/Crdit-scores-can-drop-after-apf-1601705094.html?x=0
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