As people struggle to make ends meet, many are looking to home loan modification programs for financial relief. Under Obama’s foreclosure assistance plan, homeowners can have their monthly mortgage loan payment lowered. Their new payment can be dropped to 31% of their pre-taxed income. Homeowners that qualify for the program start with a trial period of at least three months. If they can prove income and make payments on time, they will then qualify for a permanent modification.
While this program sounds great and is helping many homeowners throughout the country avoid foreclosure, some are finding there is one major drawback. A drastic drop in their credit score. Those homeowners who already had defaulted on loan payments and had wrecked their credit score previous to entering into a home modification program are not affected. Homeowners however, who have managed to keep up with their mortgage payments prior to entering into the trial program are finding that their good credit rating no longer exists.
How does this happen? Homeowners for at least the first three months are in a trial program. During this time period, lenders following industry guidelines must report to the credit bureaus according to the original loan terms. Therefore, the credit report is showing payment not in full or late, drastically reducing participants’ credit scores.
These homeowners who have worked very hard to keep their credit, entering into these programs to make ends meet, are now faced with low credit scores which can have dire consequences. These include higher interest rates on credit cards, freezes on credit card accounts, inability to find other credit when needed and higher interest rates and fees for their future borrowing needs.
On the flip side, most homeowners who enter these programs are already in credit turmoil, with low credit scores. Once they are in a modified loan program these borrowers could actually see an increased credit score. Since most people who enter these programs are already delinquent, it is only a small percentage of homeowners who are being affected.
“If you are in the trial period, over that three month period, you are going to improve your situation in most cases,” said Vicki Vidal, Mortgage Bankers Association’s group vice president of government affairs.
Those homeowners looking for relief through a home loan modification program should know what the consequences can be. If your credit is already less than stellar, these programs could improve it. If you have a great credit score you need to know what the consequences could be. If you can somehow manage your current mortgage payment, you may be better off forgoing Obama’s program.