How Will Loan Modification Affect Your FICO Score?

The ongoing recession has made consumers financially weary and they are exploring all possible means to shed their expenses. If you have taken out a mortgage but you are finding it difficult to make your monthly mortgage payments, you have several options to become regular with your payments again. And loan modification is a very appealing mortgage bailout option. Consumers have been trying hard to make ends meet because of unemployment, liquidity crunch etc. So, more and more consumers or borrowers are being tempted to opt for loan modification. But how will it affect your FICO score?

The Consumer Data Industry Association and the credit bureaus have set forth few reporting guidelines. And it has been decided that loan modification will be shown as “Partial Payment Plan” as per FICO method. This will adversely affect your credit score and lower it considerably. This holds true for borrowers that didn’t default or miss monthly mortgage payments too.

Some are of the opinion that this “designation or remark” is unfair because the lender rarely reduces the principal balance or lowers the rate of interest permanently. Some treat loan modification as a reduction in interest rate that is temporary. This is synonymous with a temporary rate reduction offered by credit card companies.

The aforesaid designation has been decided upon because it is not clearly understood whether a borrower opting for loan modification is risky in comparison to other borrowers. There are yet others that are of the opinion that loan modification gives temporary relief and that there is no guarantee that the borrower will not default again. Some call loan modification a “band aid”. And this is partly true because studies reveal that borrowers who were allowed loan modification started defaulting on their monthly mortgage payments within a year.

So, if you want to maintain a good FICO score avoid opting for loan modification. There are many other options you can avail, short refinancing being one of them. It is important to remember that if you are not paying cash to the lender you are availing the loan modification program at the cost of your FICO score. Either way you are the loser.