By Linda Ferrari – Author of the Big Score – Getting It & Keeping It
Foreclosure, Deed in Lieu of Foreclosure, Short Sale, Loan Modification and Bankruptcy can all have long-lasting impact on an individual’s ability to obtain credit. Homeowners need to get the facts before making critical decisions that will impact their lives for many years to come. In this series of seven blogs, I’ll be examining each of these options in detail so you can get a better understanding of the myths and realities surrounding them and how they affect your credit.
One of the recurring themes in my book, The Big Score, and something I always emphasize to my clients is that being proactive the key to ensuring your credit score is as high as possible! In the case of your mortgage, the way to do this is by trying to renegotiate the terms of your agreement before things get out of control.
In Part Four, I talked about how a Short Sale affects credit. Today, we’ll examine another option — Loan Modification.
Part Five – Loan Modification
A loan modification is when the lender agrees to modify a part or all of the terms of the original mortgage loan agreement. This existing note is modified and remains in place. Changes to the agreement can include: extending the term of the loan, changing the monthly payments, and changing the interest rate to make the loan more affordable and to help the homeowner avoid foreclosure or bankruptcy.
Today, in the wake of the devastating mortgage crisis, loan modifications are extremely common. So much so that a backlog of cases has forced lenders to prioritize their caseloads. This largely means that many homeowners are being forced into default to get their attention. This is unfortunate, because one 30-day late pay can cause a 75-100 point drop in credit scores.
The good news is that borrowers who choose this option vs. foreclosure or bankruptcy, show that they are exhausting every effort to pay the loan, and although this effort does not help credit scores – it will be taken into consideration by future creditors and lenders.
How Does a Loan Modification Affect Credit?
A loan modification is now being reported by lenders as an “account in partial payment plan“ and is dropping credit scores by as much as 150 points in addition to any points already lost due to lates pays which can range from 75-100 points, depending on how many points someone has left to lose.
It is important to give every effort to negotiating that the lender: 1) not report the account in partial payment plan; and 2) remove any late pays incurred during the “waiting period” of when you submit your first request for the loan modification to the time of completion.
There have been a handful of successful lawsuits against lenders for forcing homeowners into default – and the key to winning this type of lawsuit is to document every move you make when it comes to a loan modification transaction. Keep a log of every call, every email, every letter to document your efforts of trying to stay current on your current mortgage.
Here’s a tip: Statistics show that 25% of homeowners who enter into a loan modification will default on their 2nd month under the new plan. Make a deal with the lender to delete all late pays after you have made 3-6 months of on-time payments. AND GET IT IN WRITING.
No Laws Requiring Lenders To Report To The Big Three
In Part One, I gave you access to significant and powerful information to help negotiate non-reports with lenders and creditors.
There are no laws in place requiring that lenders and creditors report negative information to the three major credit bureaus. Here’s the section of the law from the Fair Credit Reporting Act:
§623. Responsibilities of furnishers of information to consumer reporting agencies [15 U.S.C. § 1681s-2]
(a) Duty of Furnishers of Information to Provide Accurate Information
(7) Negative Information
(E) Use of notice without submitting negative information. No provision of this paragraph shall be construed as requiring a financial institution that has provided a customer with a notice described in subparagraph (A) to furnish negative information about the customer to a consumer reporting agency.
Here’s the text from subparagraph (A):
(A) In general. A person who furnishes information to a consumer reporting agency regarding a delinquent account being placed for collection, charged to profit or loss, or subjected to any similar action shall, not later than 90 days after furnishing the information, notify the agency of the date of delinquency on the account, which shall be the month and year of the commencement of the delinquency on the account that immediately preceded the action.
There’s more to this story, however. An August 13, 2008 announcement from Fannie Mae & Freddie Mac clearly states that they place NO requirement on how lenders report mortgage default accounts to the credit bureaus. In response to the frequently asked question about how these items should appear on the credit report, the announcement stated:
“For reporting these actions on Fannie Mae loans, we require that servicers report to one of the major credit reporting agencies, but it is our policy NOT to direct specifically how to report various actions.”
So if the Fair Credit Reporting Act doesn’t require lenders to report negative information at all, or in a specific manner, and the nation’s largest buyer of mortgage loans does not require lenders to report negative information at all, or in a specific manner, this leaves the door wide open for negotiating deletions or non-reporting when it comes to short sales and loan modifications and in some instances foreclosures. So I reiterate: NEGOTIATE, NEGOTIATE, NEGOTIATE.
How Long Before You Can Buy Another Home After Loan Modification?
The good news is that there are no guidelines from Fannie Mae & Freddie Mac regarding consideration of Loan Modifications, however, there are rules when it comes to late pays. So if you have incurred let’s say a 60-day late on your mortgage in the last 12 months, then you may be facing a waiting period. If you have any questions about this, give me a call and I would be happy to discuss it with you.
In Conclusion
Something I always emphasize to my clients is that being proactive is the key to ensuring your credit score is as high as possible! If you are in a position of having to recover from a loan modification, foreclosure or short sale, click here to download my Special E-Report: A 10-Step Action Plan To Protect, Improve and Maintain Strong Credit Reports And Scores.
If you need help conquering your credit challenges – contact us at (866)541-2500 for a free consultation.
If you like this information that you read on this site, you may want to consider taking your expertise to the next level. Linda's book, "The Big Score, Getting It & Keeping It" is a comprehensive How-To manual on how to Get and Keep the strongest credit reports and scores. [Click here]
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Great info. It is nice to learn about the currently changing field of mortgages and credit. I get asked these questions all the time, to which I often state “it depends on how it reads on your credit!” Love the emphasis on NEGOTIATE – helps us all understand the value of a great credit restotation professional.
One thing that may be worth noting is that in the Obama plan or the Home Affordable Modification Program (HAMP) it requires a 90 day trial period to be implemented prior to being finalized.
In this trial period the 31% DTI payment is collected and since it is smaller then regular payment it sits in reserves until the next payment is collected and the combined 2 payments will equal enough to make a full payment and the remainder will sit and wait for payment #3.
In accordance with the Servicing Guide, Part VII, Section 107: Notifying Credit
Repositories, the servicer should continue to report a “full-file” status report to the four major credit repositories for each loan under the HMP in accordance with the Fair Credit Reporting Act and credit bureau requirements as provided by the Consumer Data
Industry Association (the “CDIA”) on the basis of the following:
? For borrowers who are current when they enter the trial period, the servicer should report the borrower current but on a modified payment if the borrower makes timely payments by the 30th day of each trial period month at the modified amount during the
trial period, as well as report the modification when completed.
? For borrowers who are delinquent when they enter the trial period, the servicer should continue to report in such a manner that accurately reflects the borrower’s delinquency
and workout status following usual and customary reporting standards, as well as report the modification when completed.
More detailed information on these reporting standards will be published by the CDIA.
“Full-file” reporting means that the servicer must describe the exact status of each mortgage loan it is servicing as of the last business day of each month.
One of my clients who was never late but was able to get this modification had his mortgage reported as “modified payment” lowered his 740 score down to 659 during his 2nd month of modification. No other lates on his credit report at all.