BiggerPockets

The distressed homeowners are trying to have their loans modified. Modification of house loans prevents foreclosures without harming the credit scores. Many are opting for short sale under the guidelines of HAMP plan of the Obama government.

A recent study probing into 400,000 residential mortgages indicate that modification of loan can actually increase credit scores rather than push it down. But the other options like foreclosure and filing of bankruptcy can depress scores. It would take years to recover from these low levels. The survey was taken by VantageScore Solutions – it being a joint venture under the aegis of Equifax, Experian and TransUnion. These figures are now being made use of by an increasing number of lenders as an alternative to the FICO score that has been dominating the scene for quite sometime.

The VantageScore scale runs up from 501 to 990. Low scores show risk. The FICO scores stretch from 300 to 850. The two yardsticks indicate more or less the same impact on loan modifications. The names of those who had been surveyed have been kept anonymous.

Many of the modification measures taken show, that they have hardly any impact on the credit scores. Those who had good scores at the time of loan modification  for having made down payments and fulfilled other requisites at the time of contract could find their scores go down by 30 to even 40 points after modification because of following a scheme of deferred schemes stretching up to some months. But the very same borrowers could modestly gain by 10 to 30 points if the lender forgave 10% of the principal due and decided against reporting it as charge-off to the credit score agencies. But if this report is given then the score could fall by over 100 points.

Certain modifications termed ‘ recapitlizations’ are delinquent payments that roll together with fees into a fresh balance but carrying reduced interest rate that the borrower can afford. Such modifications can to a modest degree increase the credit scores according to the study.

But those borrowers who fail to pursue modification or are refused by the lenders and have who resort to short sale, foreclosure or bankruptcy finds their scores badly hit. For those who previously had good scores will find their scores plummet by 130 points immediately. In the case of those who find themselves foreclosed the score goes down by 140 points. In bankruptcy it may go down by 365 points for those who hitherto had stellar ratings.