Is Obama’s Home Affordable Modification Program a Good Deal?
Jul 21st, 2009 @ 3:34 PM by Alden Smith
If you are in danger of default or delinquent on mortgage payments, you may wish to take advantage of the home affordable modification program that began in March. Although the program provides relief for home owners, what is little-known about the program is the damage that is done to your credit score. An article from Bloomberg gives us the information that everyone should be aware of when considering this program.
What happens is this: When you apply for a loan modification, many of the large lenders, including J.P. Morgan Chase & Co. and Bank of America, report the loan modification to credit bureaus. The credit bureaus use the FICO formula to determine your credit score, and any reporting by a lending institution will almost ensure that you will take a hit on your credit rating.
As of June this year, the country has seen a 15% increase in defaults. Over 1.5 million properties have been seized in the six months through June, according to RealtyTrac Inc. These figures indicate the need for the loan modification program.
However, if people see that participating in a program will have a negative effect on their credit score, they may hesitate in seeking help. FICO has no-nonsense rules – if they see that an account has been renegotiated for less than the full amount, they consider the person who has renegotiated the loan to be a greater risk. Currently, a score of 740 is needed to get the best deal on a mortgage. If a consumer considers renegotiating a loan to avoid foreclosure, there is little incentive under these rules to do so. A consumer may only wish to avoid foreclosure until such time as their financial situation improves and they are back on their feet financially. If a consumer knows that avoiding foreclosure by participation in this program is only going to ruin his or her credit score, they may feel it is better to just walk away now. The reasoning is simple – a consumer’s credit rating will be ruined if they negotiate a loan modification, and it will be ruined if they don’t.
If you are considering a loan modification, it pays to know the exact terms of the loan. A foreclosure will stay on your credit report for seven years. It will also damage your credit rating. The best bet would be to talk to the banker of the lending institution that you are considering using for a loan modification program, and take the advice of the banker to help you make the proper decision.
The intentions of the loan modification program are good. It would help a lot of people stay in their homes. On the other hand, the program can also ruin a decent credit rating, putting you in the position of being unable to borrow money for home repairs for emergency use unless you are willing to pay much higher interest rates.
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The Home Affordable Modification Program is an excellent program if you can get through the application! After taking days to read & understand how to fill out & quality for HAMP I was able to lower my interest rate to 2%. The application was so confusing because they want you to fail! Now that I understand how to qualify I was able to help my neighbors get approved usually in about 30 days!