Mortgage manipulation affects credit scores

by Broderick Perkins
DeadlineNews.Com

1/11/10 - How you manage your mortgage can help or hurt your credit score.

Your credit score, a numerical rendition of your creditworthiness - or lack thereof - should be at 760 or above if you want the best interest rate, according to FICO, the leading credit scoring system provider.

Mortgage lenders as well as other creditors take a hard look at your credit score when you want to borrow against your home, refinance or buy anew.

If you are struggling financially as a homeowner you may be considering some of the new ways to make your mortgage more affordable, but beware.

Look beyond the monthly savings you can net on a mortgage modification, workout or short sale and also carefully consider how those savings will affect your credit score.

"The number borrowers who have reported being misled by their lender/servicer about the impact the loan modification process would have on their credit is alarming," says Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.

According to FICO:

• If you get a mortgage modification or short sale, expect some negative impact. There are many variables here: how the lender reports the deal; what's already on your credit report (negatives compound), etc. A loan modification or short sale are certainly less damaging than a foreclosure or bankruptcy.

Consumer Reports' Money Advisor suggests that before you enter a mortgage modification or short sale, ask how the lender will report it so you can weigh your priorities. If you need the break, take the deal sooner rather than later, even if it will hurt your credit score. Negatives on your credit file are removed after seven years. The sooner you get the clock ticking, the better.

"Many borrowers claimed to have been told expressly by their lender/servicer that their credit rating would not be damaged in the course of modifying their loan, only to discover that this was not the case," Osborne said.

• If you are rejected for a loan several times, expect a small negative. It's the inquiries the credit scoring model sees, not the rejections. Too many inquiries may indicate you are trying to pile up a lot of credit in a short time and that's deemed risky behavior.

Consumer Reports advises loan shopping within a 14 to 30 day period. FICO counts all mortgage inquiries within that period as one inquiry. Also consider applying for credit in person so you can ask about the lender's requirements and your chances for approval. If one lender's underwriting standards are too tight, seek a more lenient lender, Consumer Reports also advises, to reduce the number of inquiries.

• If you have a subprime or adjustable rate mortgage (ARM) on your credit report, expect zero impact. The FICO scoring system isn't privy to the underwriting terms of your loan. Keep making payments on time and or refinance to a lower fixed rate if you can and you'll keep your score intact or boost it over time.

• If you get debt relief from a credit counselor, expect a ding. That's because you aren't living up to the original terms of the credit agreement. Get the help if you need it, again, the sooner you begin to correct credit problems, the sooner they leave your credit file.

Consumer Reports advises working with certified counselors from the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. For housing issues, see counselors certified by the U.S. Department of Housing and Urban Affairs

• If you get a "goodwill correction" from your lender, expect a positive effect on your credit score. If, say, you were late once on your mortgage and never again in several years, it can't hurt to ask your lender to remove the one ding.

• If you pay the mortgage but fall behind on other bills, expect black marks that negatively effect your credit score. FICO doesn't weigh your payment history on one type of loan more than another.

Consumer Reports says there are no "less important" creditors when it comes to your credit score. Call creditors before you get into trouble and try to work something out.

"In some instances borrowers who had never been late on a single payment, were encouraged to seek help to modify their loan and then discovered down the line that they had been reported to the credit bureaus as not having "paid as agreed" or as having only made "partial payments," Osborne said.