Mortgage Modification: A Credit Score Killer

Many troubled homeowners view President Obama's foreclosure rescue plan as a way out of their financial troubles. What they don't realize is, entering a trial mortgage modification can actually hurt their credit.

Let's face it, most people who apply for the president's plan are already delinquent in their mortgage payments, which wrecks their credit backgrounds. And obtaining a trial modification should affect borrowers' scores because it shows they cannot meet their original obligation.

Under the president's plan, troubled borrowers can have their monthly mortgage payments reduced to 31% of their pre-tax income.

Homeowners are first put in a trial modification for several months to prove they can handle the new commitment and to give the bank time to collect the necessary income and hardship verification documents.

During this period, industry guidelines call for loan servicing companies to report borrowers to the credit bureaus according to their status before they entered the modification - either current or the number of days delinquent. However, borrowers' accounts are also designated with a code indicating they are in a partial payment plan.

The coding alone can impact credit scores, which measure a consumer's financial health and range from 300 to 850 under the FICO system. The severity depends on how many payments the borrower missed before entering the program. Those who were current in their mortgages could see their scores fall up to 100 points.

Once borrowers receive a permanent modification, their payment status is listed as current. However, the delinquency remains on their credit reports for up to seven years. Something to think about BEFORE you get into a mortgage modification plan.