Can Loan Modifcation Programs Lower your Credit Score

The simple answer to whether or not Obama’s Loan Modification Program can lower your score is yes. In many cases, taking advantage of this government assistant program has actually lowered people’s credit score.

The Obama administration set aside $75 million for a program called “Making Home Affordable.” The consumers who take advantage of the loan modification program are often trying to save their credit as well as save their home and avoid a foreclosure. For those who have been making payments on time but are now trying to avoid default, the result of seeking this loan modification assistance can be around a 100 point downfall in their credit scores.

Lower credit scores can make it even harder for already financially strapped families to get loans. Credit scores are also sometimes part of the job screening process and some argue that lowering credit scores can hurt the unemployed. Many who need to take advantage of the loan modification program found themselves knocking on this door after becoming unemployed. The lower credit scores for those asking for help seems to be part of a vicious downward cycle.

The “Making Home Affordable” loan program offers a three month trial period for homeowner’s to make a reduce payment on time. During this trial phase often mortgage companies are notifying the three credit bureaus, Equifax, TransUnion and Experian and this is when their credit scores are taking the dive. If you are ruled as ineligible to participate in the program it can hurt your credit score even more.

There are arguments on both sides for why or why not this lower credit score should be a result and whether or not this is fair.

Fair or Unfair?

Housing counselors like Eileen Anderson, question,

“Why should people’s credit be hurt eve worse when they are trying to do the right thing?”

The credit rating industry defends the practice of the reporting enrollment and adjusting credit scores. According to Norm Magnuson, spokesman for the Consumer Data Industry Association, says,

“The consumer is going into the program because they’re in a financial bind. Other lenders would need to be aware of that.”

One of the big issues though seems to be that people aren’t aware that enrolling in the program can lower their credit score. Housing counselor, Kathy Conley says,

“It’s a feeling of being duped.”

On the other side of the coin…

Late or missing payments and a foreclosure can bring a credit score down even further, often as much as 150 points. A foreclosure or a deed in lieu can create credit chaos for years. While many consumers try a deed in lieu (turning the property back over to the lender) to avoid foreclosure, credit agencies see it the same way. Experts say your best bet is to negotiate with the note holder to report the balance as paid in full but all loan holders aren’t going to agree to this.

It is important to keep in mind that if you’ve already had missing or late payments or would incur them then the credit score would be taking a dive anyway.

So far about 170,000 homeowners have completed the “Making Home Affordable” program and hundreds of thousands are still in the process.