The cost of loan modifications.

This topic has been in the minds of many homeowners as they try to keep up with their mortgage payments.  One of the solutions often suggested by attorneys, the media and politicians are loan modifications.   A loan modification is simply a temporary change in the loan terms resulting in a lower payment.   In other words the interest rate is reduced or the term is extended.    The issue at hand is how mortgage servicers may report mortgage loan modifications to the credit reporting agencies and, secondly, how that credit reporting impacts the consumers’ FICO credit scores. According to the Consumer Data Industry Association, the credit bureaus have agreed to guidelines that loan modifications will be reported as a “Partial Payment Plan.”

The problem with this decision is that FICO credit scores interpret the notation of a “Partial Payment Plan” as negative. Consumers will see their scores decrease because of such a classification. How much their scores decrease will depend on from where their scores started. A score of 550 isn’t going to decline the same number of points as a score of 750.

This situation may not seem fair or consistent with other credit reporting issues, but one thing is certain and that is before you agree to a loan modification make sure you are fully aware of all of it’s implications including how your lender will report the loan modification to the credit bureaus.

Written by guest blogger Tony Pigatti of Archer Bank TPigatti@Archerbank.com

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