Mortgage Modification Can Affect Your Credit

Mortgage modification has recently become a popular option for homeowners who are having difficulty meeting their financial responsibilities. Mortgage modification can help financially strapped families avoid foreclosure and remain in their homes. However, it is important to know that mortgage modifications can also have an effect on your credit.

When you apply for and subsequently accept a mortgage modification from your lender, that modification is reported to the three credit bureaus. The report should indicate that you, the mortgage holder, are participating in a program that qualifies you to send in partial payments on your mortgage. This is translated negatively on the your credit report, leading to a decreased score. 

The good news is, the hit on your score will most likely be small. The U.S. Treasury Department recently reported that it can range from 30-100 points. For a family facing foreclosure, which is guaranteed to create an even larger hit to the credit score, it is probably worth it to take the smaller decrease and move forward with mortgage modification. Fortunately, credit bureaus are now developing a new way to report some mortgage modifications in a way that will not negatively affect your credit. Still, it is important to be aware of all the financial implications of any mortgage modification. Possible unforeseen effects, such as decreased credit, are why it is so crucial to consult an attorney before making major financial decisions. Your attorney will guide you through the process and help you make the right decision for your family.

- Kevin McKernan

The Ins and Outs of Loan Modification

If you have had trouble paying your mortgage each month and/or your home is at risk for foreclosure, you may have been told to look into mortgage modification. In fact, in 2012, five of the country's biggest banks came to a settlement agreement with the government so that more homeowners could gain access to loan modifications if they were experiencing financial hardship.

How Loan Modifications Work
When you apply for a loan modification, you must send in a bevy of financial documents. Your mortgage bank is looking to calculate the percentage that your monthly mortgage and insurance payment takes in relation to your monthly gross income. This is commonly known as your "debt to income" ratio. If your lender sees that your "debt to income" ratio is too high for you to make your monthly payments without financial hardship, they will make you a modification offer, which you as the homeowner may either accept or deny. In order to make your payments more affordable, your mortgage lender may lower your interest rate for a certain amount of years, forgive certain loan amounts, and/or extend the term of your loan.

Unforeseen Consequences
However, for many people, loan modification was not the catch-all solution that they hoped for. Modifications require a lot of time and paperwork, with banks often dragging their feet during the process. Additionally, in some circumstances, certain modifications can actually negatively effect you in the long run. The negative aspects of loan modifications can be seen in this statistic given by the Comptroller of the Currency, John Dugan, who asserted that in 2008 over 53% of loan modifications in the United States resulted in another default after six months.

How to Get Help
If you are considering a loan modification, make sure you seek legal counsel before you do so! It is incredible how many people make the mistake of signing an incredibly important legal document without first consulting an attorney. A good lawyer will be experienced in loan modifications, having assisted clients with them many times before, and can correctly gauge whether or not the modification is the best for your unique financial future.

If you are a homeowner who was taken advantage of by unscrupulous mortgage lender, you still have options. There are ways to stop or delay the foreclosure sale of your home. If you find yourself in this situation, it is crucial that you consult an attorney. At the height of the housing boom, mortgage notes and other financial documents were passing through banks at a never before experienced speed. This resulted in a high amount of clerical error and sometimes illegal financial practices. An attorney can closely review your case to check for substandard practices that you could potentially change the outcome of your foreclosure.

If you are struggling with a loan modification, feel free to contact me at my office at (718) 317-5007.

- Kevin McKernan