The New York Times has posted an article that discusses how mortgage modifications affect homeowners’ credit scores. Lenders can use special codes to keep track and let credit bureaus know if homeowners are paying on time.
When the loan modification program, which lowers mortgage payments for homeowners who are behind in their payments or in danger of imminent default, was announced in February, lenders used an existing code, called AC, to signal that borrowers were participating in the program.
A problem is that the AC code only shows that a partial payment was made. That can cause a credit score to fall anywhere from 30 to 100 points. The AC is an old code that is just being used until a newer one is developed. Nonetheless, it is responsible for damaging the credit scores of homeowners who “made timely payments before and after agreeing to loan modifications as making only partial payments.”
Banks should switch to a code that doesn’t damage credit scores. Consumers can also call and request it. They can also file disputes and ask for corrections on credit reports that were affected by the old code.
But shouldn’t people with modified loans who never missed a payment not suffer a credit score decline under any circumstances? Industry experts believe that some mark is necessary. The reason: those getting the modifications in the first place probably pose more risk to future lenders, given that the mortgage modification program was devised to help people whose money problems make them vulnerable to foreclosure. “They are having financial difficulty, so there is some risk involved,” said Mr. Magnuson.
If you have further questions or concerns, feel free to contact us through our website or by calling 205-879-2447.