By: Kari Michel
The U.S. government and mortgage lenders have developed various loan modification programs to help homeowners better manage their mortgage debt so that they can meet their monthly payment obligations. Given these new programs, what is the impact to the consumer’s score? Do consumer scores drop more if they work with their lenders to get their mortgage loan restructured or if they file for bankruptcy?
The finding from a study conducted by VantageScore® Solutions* reveals that a delinquency on a mortgage has a greater impact on the consumer’s score than a loan modification. Bankruptcy, short sale, and foreclosure have the greatest impact to a score. A bankruptcy or poor bankruptcy score can negatively impact a consumer for a minimum of seven years with a potential score decrease of 365 points. However, with a loan modification, consumers can rehabilitate their scores to an acceptable risk level within nine months. This depends on them bringing all their delinquent accounts to current status. Loan modifications have little impact on their consumer credit score and the influence on their score can range from a 20 point decrease to an increase of 30 points.
Lenders should proactively seek out a mortgage loan modification before consumers experience severe delinquency in their credit files and credit score trends. The restructured mortgage should provide sufficient cash availability to remain with the consumer. This ensures that any other delinquent debts can be updated to current status. Whenever possible, bankruptcy should be avoided because it has the greatest consequences for the lender and the consumer.
*For more detailed information on this study, Credit Scoring and Mortgage Modifications: What lenders need to know, please click on this link to access an archived file of a recent webinar:
http://register.sourcemediaconferences.com/click/clickReg.cfm?URLID=5258
