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Loan Modification - credit killer!

In Part One of our loan modification post, we discussed the fact that banks are sending unsolicited offers of loan modification to mortgage holders. These deals, which often involve a change from adjustable-rate mortgages (ARMs) to fixed-rates or partial “principal forgiveness” make a lot of sense from a purely economic standpoint: the banks get to clear their books of “toxic assets” and you get a lower mortgage payment. Unfortunately, the results can ding (or even wreck) your credit score.

 

There are a number of reasons why this is the case. First, the bank reports activity on your account to credit bureaus, which then alter your credit score accordingly. If you modify your loan and the bank submits “settled for less than the full amount due” to a credit bureau, that’s going to hurt you. And while this is technically true, a tiny line item leaves out the important information that it was, in fact, the bank that suggested the modification in the first place. To avoid this, make sure you ask specifically how the bank is going to report the change. If they don’t give you a straight answer right away, be clear that you’re trying to avoid “settled for less than the full amount due”.

 

Further, if the loan modification requires a trial period, especially one that lowers your mortgage payment, that trial period can damage your credit, as the bank will have to report the payment as less than what you owed, even though it’s the amount of money the bank is expecting, and will not respond to the customer as if anything were out of order.

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Loan modification – is the lower payment worth it?

If you’re like an increasingly large number of Americans, you’ve recently received a letter from your bank. And if you’re lucky, it’s not a notice of foreclosure--it’s a letter announcing an offer for a loan modification. The banks are handing these things out like candy these days, and most people, especially those with banks that already have a tendency to try to upsell to their customers, are suspicious.

 

A lot of these loan modifications include options to switch an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, partial debt forgiveness, and other bells and whistles. And, while the banks are not doing this out of some sudden bout of philanthropy, many unsolicited loan modifications are a good deal for both parties. Before we continue, never ever assume that all loan modification offers come from reputable sources because most are paid advertisements. There are scammers out there that will take you for all your worth if you aren’t vigilant. Real loan modification offers should come from the bank that handles your mortgage.

 

Banks are trying to get ARM loans out of their systems--they’re far more likely to end in default than fixed-rate loans and the government views them as “toxic assets”, which in turn can affect how the government and investors deal with the banks. In short, a farewell to ARMs is a hello to more money for the bank.

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