Friday, January 15, 2010

Manipulate your mortgage, mangle your credit score

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If you are struggling financially as a homeowner, you may be considering some of the new ways to make your mortgage more affordable, but look beyond the monthly savings you can net on a mortgage modification, workout or short sale.

by Broderick Perkins
© 2009 DeadlineNews.Com

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Deadline Newsroom - How you manage your mortgage can help or hurt your credit score.

Your credit score, a numerical rendition of your creditworthiness - or lack thereof - should be at 760 or above if you want the best interest rate, according to FICO, the leading credit scoring system provider.

Mortgage lenders as well as other creditors take a hard look at your credit score when you want to borrow against your home, refinance or buy anew.

If you are struggling financially as a homeowner you may be considering some of the new ways to make your mortgage more affordable, but beware.

Look beyond the monthly savings you can net on a mortgage modification, workout or short sale and also carefully consider how those savings will affect your credit score.

"The number borrowers who have reported being misled by their lender/servicer about the impact the loan modification process would have on their credit is alarming," says Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.

According to FICO:

• If you get a mortgage modification or short sale, expect some negative impact.
There are many variables here: how the lender reports the deal; what's already on your credit report (negatives compound), etc. A loan modification or short sale are certainly less damaging than a foreclosure or bankruptcy.

Consumer Reports' Money Advisor suggests that before you enter a mortgage modification or short sale, ask how the lender will report it so you can weigh your priorities. If you need the break, take the deal sooner rather than later, even if it will hurt your credit score. Negatives on your credit file are removed after seven years. The sooner you get the clock ticking, the better.

"Many borrowers claimed to have been told expressly by their lender/servicer that their credit rating would not be damaged in the course of modifying their loan, only to discover that this was not the case," Osborne said.

• If you are rejected for a loan several times, expect a small negative. It's the inquiries the credit scoring model sees, not the rejections. Too many inquiries may indicate you are trying to pile up a lot of credit in a short time and that's deemed risky behavior.

Consumer Reports advises loan shopping within a 14 to 30 day period. FICO counts all mortgage inquiries within that period as one inquiry. Also consider applying for credit in person so you can ask about the lender's requirements and your chances for approval. If one lender's underwriting standards are too tight, seek a more lenient lender, Consumer Reports also advises, to reduce the number of inquiries.

• If you have a subprime or adjustable rate mortgage (ARM) on your credit report, expect zero impact. The FICO scoring system isn't privy to the underwriting terms of your loan. Keep making payments on time and or refinance to a lower fixed rate if you can and you'll keep your score intact or boost it over time.

• If you get debt relief from a credit counselor, expect a ding. That's because you aren't living up to the original terms of the credit agreement. Get the help if you need it, again, the sooner you begin to correct credit problems, the sooner they leave your credit file.

Consumer Reports advises working with certified counselors from the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. For housing issues, see counselors certified by the U.S. Department of Housing and Urban Affairs

• If you get a "goodwill correction" from your lender, expect a positive effect on your credit score. If, say, you were late once on your mortgage and never again in several years, it can't hurt to ask your lender to remove the one ding.

• If you pay the mortgage but fall behind on other bills, expect black marks that negatively effect your credit score. FICO doesn't weigh your payment history on one type of loan more than another.

Consumer Reports says there are no "less important" creditors when it comes to your credit score. Call creditors before you get into trouble and try to work something out.

"In some instances borrowers who had never been late on a single payment, were encouraged to seek help to modify their loan and then discovered down the line that they had been reported to the credit bureaus as not having "paid as agreed" or as having only made "partial payments," Osborne said.

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© 2009 DeadlineNews.Com



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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop.

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3 comments:

Kirk said...

I've had several homeowners back up your comment on not having been told their credit score could be negatively impacted. It's not across the board though, I know of a mod company who make it crystal clear up front but get complaints later from the home owners who "forgot". As with anything else you should get it all up front in writing.
Best point in my opinion is to ask a creditor to remove a bad mark. If you have a great history with them and only one or two non recent blemishes you need to ask them to remove it. Especially in the area of revolving credit such as credit card debt which can make up 30-35% of your score.
It's well worth the time to ask and only takes a few minutes. An improvement of 5-10% on a 700 score is significant and can save you a great deal of money on other credit or your next mortgage. It could also help you qualify where you might not today.

Home Loans said...

When we think to adapt a mortgage plan, first of all we need to think about what we have in our pocket.

Credit Repair Services said...

According to Yahoo News, Mon Jul 12, 2010:

The credit scores of millions more Americans are sinking to new lows.

Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It's unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.