Understanding the effects of loan modifications versus defaults on credit scores
During these challenging economic times, having greater insight into consumer behavior can help lenders protect themselves and better advise customers weighing the consequences of a loan default, a bankruptcy or a loan modification.
Though it may appear counterintuitive, homeowners with high credit scores may be more likely to walk away from their home loans than their counterparts with lower scores. Called strategic defaulters, these borrowers purposefully become delinquent on their mortgages — even when they can afford the payment — because their loan balances exceed the value of their homes. In 2008, strategic defaulters represented 18 percent of all mortgage defaults — a 500 percent increase over 2004 statistics. Generally, these borrowers reside in areas where home values have plummeted and they have higher loan balances.
While these borrowers believe they are choosing the lesser of two evils and often view their loan default as a business decision, they often are making a momentous choice without having all of the facts.
For example, a study conducted by VantageScore Solutions, LLC reveals that a delinquency on a mortgage has a much greater impact on a consumer’s score than a loan modification, with a bankruptcy, a short sale and a foreclosure impacting a score the most profoundly. In fact, loan modifications often have little impact on consumer credit scores. Click here for more information on the loan modification study — Credit Scoring and Mortgage Modifications: What Lenders Need to Know — and access to a complimentary Webinar.
Consumers can learn more about the potential impact of mortgage loan modification on their credit report and credit scores at Ask Experian. The online advice column provides extensive information consumers can use to manage and protect their credit histories.
For more information on strategic default in mortgages, click here to download a complimentary Webinar.