Saturday, November 7, 2009

Can A Mortgage Alteration Lower Your Credit Report?

Many people these days are considering if they should apply for the government sponsored colorado map program Making Home Affordable. One of the major concerns folks have is what effect a loan alteration will have on their credit score.

Until now a colorado commercial mortgage was reported in various ways depending upon the individual bank and their reporting rules. Some banks would report a mortgage modification as “paid as agreed”, however, most would report them as “partial payment”, which has a derogatory impact on a person’s credit score. A “partial payment” report is a serious negative, in the same category as a foreclosure or short sale according to FICO spokesman Craig Watts. FICO, is one of the 3 largest credit reporting companies in the US.

New reporting plan

Starting November 1, 2009, mortgage companies are encouraged to use a new benign way to report government-sponsored loan alteration. Under guidelines put out by the Consumer Data Industry Association, lenders should report them as a “loan modificationunder a federal government plan”. CDIA is the association which represents credit bureaus. FICO, the leading provider of credit scores, will ignore this new notation for the time being. It will neither help nor hurt a home owner’s credit numberscore until FICO decides how to treat it. FICO says new mortgage changes will not hurt scores. “Once there is enough documented performance for people who went through a government sponsored loan modification, we will be able to assess the accumulated data to determine how predictive it is”, says FICO spokesman Craig Watts. As a rule the analysts prefer having at least a year’s worth of performance data before making any alterations to its credit-scoring formula.

Under the associations guidelines, if a person is current with his mortgage payments before and during a trialmortgage alteration period (typically three months), the lender is supposed to report the mortgage as current.

Starting November 1, 2009, if the loan adjustment is approved after the trial period, the lender adds a comment that it was modified under a federal plan instead of the dreaded “partial payment”.

If the mortgage was at least 30 days past due before the trial mortgage modification, payments during the trial period will not bring it above water. The lender will continue to report the appropriate level of delinquency, but if the note alteration is approved, it will reported as a loan alteration under a federal plan.


The new designation could affect a home owner down the road if FICO decides to treat it as a risk factor. Even if it never affects the scoring formula, potential mortgage company can see it on an applicant’s credit report and decide for themselves how to handle it. Have in mind that in a few cases the financial instituations will look beyond a credit report and study someone’s full credit history when determining a home owners’s credit worthiness.