Credit scores can drop after getting loan help
Homeowners see credit scores sink after signing up for mortgage relief

WASHINGTON (AP) -- Some homeowners who sign up for the government's mortgage assistance program are getting a nasty surprise: Lower credit scores.

For borrowers who are making their payments on time but are on the verge of default, the Obama administration's loan modification program can reduce their credit score as much as 100 points. That makes it harder to get a loan and can present a problem when applying for a new job.

Housing counselors say it's unfair, especially because the news often comes as a surprise to homeowners.

"Why should people's credit be hurt even worse when they're trying to do the right thing?" said Eileen Anderson, senior vice president at Community Development Corp. of Long Island, a housing counseling group in New York.

And many homeowners are angry that a program designed to help carries such a penalty, said Kathy Conley, a housing counselor with GreenPath Inc., a nonprofit group in Farmington Hills, Mich.

"It's a feeling of being duped," she said.

To enroll in the Obama administration's $75 billion "Making Home Affordable" program, borrowers enter a trial period in which they make at least three payments. But some are finding out that their credit score takes a dive during this trial phase. It happens once their mortgage company notifies the three big credit bureaus -- Experian, Equifax and TransUnion.

The Obama administration acknowledges that enrolling in the program can hurt credit scores.

The credit score issue is an unexpected consequence of the program that has been plagued with problems and disappointing results since its launch last year. Only about 170,000 homeowners had completed the process as of February. Hundreds of thousands more are still in limbo.

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If people are paying their bills on time, but are 'on the verge of default' ... maybe their credit score should be lowered?? 

The credit score is not all about personal responsibility (although personal responsibility is one factor that will affect it). The credit score also measures certain things about your economic position.

Millions of people had their credit limits reduced due to external factors (the 'credit crunch'), and this reduced their credit scores significantly even if they kept paying every single bill on time. The person didn't change - the bank's ability to make loans did! But no man is an island, and no credit score is based purely on the responsibility of the individual.

The credit score penalizes people who are responsible enough to pay off their debts entirely and close down their revolving charge accounts. Suddenly, they have less available credit (Ding!), and part of their credit history has been shortened. (Ding!) 

Should employers use credit scores to help make decisions related to hiring, firing, or promotions? Should your auto insurance rates be dependent on your credit score as well as your accident history? Those are separate questions, but they are worth asking.

My husband and I have four credit cards, all of which are paid in full each and every month.  One for my business, one for his business and two with low credit limits for general household/gas/etc stuff.

We have no car payments, no store credit cards, no debts other than the mortgage on our personal home and on a rental property we own - both of which are paid every month (actually we're two months ahead in payments).

Our mortgage lender on the rental offered a refinance on the mortgage.  I said, OK, make me an offer.  They ran my credit report, and my FICO was very high thankfully.

But.... because the credit limits on those four cards was pretty high ($50,000, $30,000, $5,000, $5,000), even though I pay off all charges immediately, the reporting agencies lowered my score because of what I "could" charge.

So, in my personal opinion, it doesn't make a hills beans of difference whether you pay all bills in full every month or you make the minimum payments every month.  What you "could" charge makes all the difference in your score.

Sandy

Bob P wrote on Mar 21^st, 2010 at 7:22am:

This loan modification stuff is the meat of my business of late.. I should charge a commish on modification assistance. At least here in Oregon, prices are still depressed, and, frankly, people are scared of purchasing, since jobs are scarce, and businesses are still folding.
To that end, I am pretty knowledgeable, and, as Batch said above, things are being 'made up as they go along" here.
IF you qualify for a loan mod....after 6+ months of providing duplicate and triplicate proof of employment, impassioned letter of explanation as to HOW you no longer qualify for the loan you received. after you've been turned down for a traditional refinance(generally because your appraised value is 20% lower than it was 2 yrs ago.....after jumping thru HOOP after HOOP.....you finally get a letter that states,,,,,to the effect: Congrats, your financial life sucks enough that Uncle Barack is gonna help you out.....send EXACTLY X  number of dollars, in certified funds, on EXACTLY the first of the month, for 3 months, and, after that trial period, we will make this agreement permanent and will supercede the terms of your original mortgage..........at that point, your loan servicer-who might have been the facilitator for your loan mod as well-has the OPTION of reporting your reduced payments as 1-pays on time, no change 2- late for 1-2,3 payments, putting you at the HOT stage of default, as some have been known to do, (one hand not aware of what the other hand is doing) reject the trial payments, since they do not cover the p&i, throwing you immediately into a deficit situation, and BANG, foreclosure........
Obviously, the first option is the best, but depends on how your servicer handles it.
Approx 1/3 of the lenders I have worked with understand the ramifications and are willing to waive reports for this 3 month trial, AS LONG AS  no payments are late currently.....in other words, you must continue to make the full monthly payment while the lender is building your file, developing a plan and losing your paperwork..in order to keep your credit scores intact.
It's not an easy road, and each file is handled differently....and the short reply, Steve is YES, scores can go down..... but not nearly as much as a short sale or foreclosure would ding you.

Personally, I think, for people who genuinely need it, the loan mod program is an excellent one. IF your scores are good, and you RIGHTEOUSY have fallen victim to this new "weaconomy", you can see your payments dropping considerably-to as low as 2.3% interest.......keeping you IN your home, giving you time to recoup, and, perhaps, regain some equity position, so you can get out, in time.
Rules change by state, vand as noted above, by lenders as well.....this is not an easy project for laypeople to undertake. ASK FOR PROFESSIONAL HELP...and, if a Realtor is here to help you, know they will make not a single penny on the deeal........BUT
Loan Mod CAN work.

Hoping NOONE here needs that kind of help!
Cathi

Don't worry though. Consumerism never stays down for the count.

Things will be back to "normal" soon enough. How lucky can we be?

Charlie