By Andrea Stiles Pullas (ACCION USA Senior Director of Financial Literacy)
Are you a homeowner struggling to make your monthly mortgage payments? Have you considered entering a loan modification program with your lender or servicer? Read the following information to protect your credit.
What Is a Loan Modification Program?
A loan modification program is when the terms of a mortgage are modified to create a more affordable monthly payment. Loan modification programs are recommended for homeowners experiencing a financial hardship that prevents them from making timely monthly payments on their mortgage. These programs are one of many options available to homeowners to avoid foreclosure, and most mortgage lenders and servicers offer them. Due to the recent economic crisis, the federal government has launched a program called the Home Affordable Modification Program (HAMP).
To make mortgage payment more affordable, the lender or servicer may decrease the interest rate, extend the term of the loan or delay principal payments until the loan matures. It is important to understand that a loan modification is different than a refinance. In a refinance, a new loan is issued, whereas with a loan modification, changes are made to an existing mortgage.
How Can a Loan Modification Program Damage My Credit?
If you are having a hard time paying your monthly mortgage payment and decide to enter a loan modification program, the terms of your mortgage will be modified for an initial 90 day trial period. If you make all of your payments in full and on time during the trial period, the terms of your mortgage will be modified permanently.
Unfortunately, many of the lenders and servicers that operate loan modification programs do not update the credit bureaus about the modified terms of the mortgage during the trial period. Even if you make your modified payments on time and in full, you will still show three late payments on your credit report.
The late payments will lead to a decrease in your credit score and will appear on your credit report for seven years - affecting your ability to access credit from other sources, including ACCION USA!
What Can I do to Protect My Credit?
- Contact your lender or servicer - If you are having troubling making your monthly mortgage payments contact your lender or servicer to find out what your options are. It is better to explore your options before you are late with your payments than afterward. By contacting your lender beforehand you demonstrate a willingness to do the right thing.
- Ask about reporting - If you decide to enter a loan modification program, make sure to confirm with your lender or servicer that they will change your loan information with the credit bureaus at the start of the 90 day trial period. Ask for this confirmation in writing.
If you have already entered a loan modification program and are concerned that your credit may have been damaged during the 90 day trial period go to www.annualcreditreport.com to check your credit report.
If you show late payments on your mortgage account, contact your lender or servicer immediately in writing and request that they contact the bureaus to rectify the error. You should also submit a dispute letter to each of the bureaus to correct the mistake. Don't leave it solely up to your lender or servicer to fix the problem. Take matters into your own hands!
Loan modification programs can be a real livesaver if you are having trouble with your mortgage payments. Follow our advice to make sure that they work for you instead of creating more problems.
More Advice On Loan Modification Programs:
- Stay in contact with your servicer and/or mortgage counselor at all times. Notify them of any change in your circumstances, including new employment or problems with making payments under any modification plan.
- Be patient, cooperative and honest, and keep your commitment on any modification agreement.
- A HAMP modification is not the only option available. If you do not qualify for HAMP, ask your servicer about other "workout" alternatives, including postponements of regular payments (called forbearance), repayment plans, non-HAMP modifications and other options.
- Only work with reputable servicers and counselors. There are a lot of fraudsters out there looking for targets.
(above points sourced from the Home Loan Learning Center website)
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