Your Credit Score May Sink When You Sign up for Mortgage Relief

Your Credit Score May Sink When You Sign up for Mortgage Relief

According to the Washington Associated Press, if you sign up for the government’s mortgage assistance programs, there’s a chance you may get something you don’t expect – a lower credit score.

What are these mortgage assistance programs?

  • Home Affordable Refinance: This option can help you refinance into a more affordable mortgage if you’re paying your mortgage on time but you’re unable to refinance to a lower rate because you owe more on your mortgage than your home is currently worth.
  • Home Affordable Modification: This option can help you get mortgage payments you can afford if you’re delinquent in making your monthly mortgage payments, in the foreclosure process, or current on your payments but have recently experienced hardship and you are about to miss a payment.

There are many pitfalls showing up with these programs. One very important one is this, if you are struggling to continue making your payments on time so you sign up for a government loan modification program,your credit score could immediately reduce by as much as 100 points! What? Why?

Well, if you are having financial troubles but managing to pay your bills on time, a request for a loan modification is the first sign to the lenders of difficulty.

Here’s what happens. When you enroll in the “Making Home Affordable” program, you are given a trial period during which you must make at least three on-time payments. Problem is, during this trial phase while making your on-time payments,  the mortgage company notifies the credit bureaus that you are having trouble making on-time payments. Not late, not missed a payment, just that you applied because you are struggling with your on-time payments. Experian, Equifax and TransUnion often record those problems immediately.

The credit rating industry defends itself by saying that, “The consumer is going into the program because they’re in a financial bind. Other lenders need to be aware of that.”

The Obama administration acknowledges that enrolling in the program can hurt credit scores. But, according to the Huffington Post, Meg Reilly, a Treasury Department spokeswoman, said that foreclosure “brings far more serious financial consequences for borrowers and their families.”  Really?

If you become delinquent on your payments, the damage is done to your credit when you fall behind on your loan. If your home goes into foreclosure, your credit can drop by 150 points or more.

The credit score issue is just one consequence of the program that has many problems and disappointing results. Only about 170,000 homeowners had completed the process as of February, 2010. Hundreds of thousands more are still in process.

On a positive note, if you do manage to get accepted into one of these programs and have your loans permanently modified, your lenders are supposed to update the credit bureaus. This should bring your credit scores back up. Be sure to watch your credit report to make sure this is done for you if and when your loan is made permanent. Don’t sit back and assume it’s happening automatically.

Applying for these programs may still be the answer for you, just be aware of what can happen when you get started.

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