What is the Credit Score Impact of Loan Modifications?

The Obama administration’s Making Home Affordable program intends to help 4-5 million homeowners refinance their mortgage to stay in their home, thereby reducing the number of foreclosures and helping to stabilize home prices. However, there may be an unintended consequence to this initiative.

Up until recently, loan modifications were relatively rare and indicated increased credit risk. Many otherwise creditworthy homeowners who have modified their loan have seen a drop, possibly a large one, in their credit score. The higher the premodification credit score, the larger the potential drop.

Jack Guttentag, professor of finance at the University of Pennsylvania’s Wharton School of Business, has said that this may deter people from trying loan modifications, possibly resulting in fewer modifications and more foreclosures.

A new classification will be added in November that will allow lenders to specify if the modification is a part of the government program. FICO may also do more in-depth research on load modifications to gauge if their formula needs to be adjusted.

The consequences of a loan modification are less severe than a foreclosure. Any troubled homeowner seeking a modification is advised to understand the exact terms of the modification, work with a nonprofit housing counselor, and ask the lender if the modification is a part of the government program.

If you are a troubled homeowner who does not meet the loan modification criteria, please give us a call for a confidential consultation about the possibility of a short sale. Please give Tracy Baranowski a call at 850.259.4270 or Craig Baranowski at 850.259.1788 or email  us @ info@teambaranowski.com. Team Baranowski has a 100% success rate for all of our short sales for 2009!

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