Impact of Loan Modification and Refinancing on Credit
February 1, 2010 by admin
Filed under Mortgage Loan
What is loan modification?
A modification made by a lender to an existing loan in response to a borrower’s long-term incapability to reimburse the loan. Loan modification agreement typically involves a reduction in the interest rate on the loan, a different type of loan, an extension of the length of the term of the loan, or a combination of any of the three. A lender may be open to modifying a mortgage because the cost of mortgage modification may turn out to be less than the cost of default or foreclosure. There are many loan modification companies that negotiate with the lenders to get the borrowers a fair deal. A loan modification attorney from the company will handle the homeowner’s case. The attorney bargains with the lenders for lower interest rates, exemption from penalties, and late fees.
In principle, a mortgage loan modification should not affect the credit scores of the borrower negatively. The lender has accepted to change the terms of the loan. And if the borrower remains current on the loan with the new terms, then chances are those credits scores may improve. However, if the reason for a debtor applying for mortgage modification is defaulting, then it will affect credit rating. Americans seeking loan modifications under Obama’s Home Affordability program must go through a three-month trial phase, wherein they have to make installments according to the new terms. This federal program was aimed at homeowners facing foreclosure. With reduced interest rates and longer repayment period, low mortgage payments are guaranteed. However, there were many misunderstandings regarding these trial payments. A new credit code is being put into practice to deal with the problems.
Refinancing and short sale
‘Refinancing’ usually means paying off the existing mortgage by taking a new, cheaper one. So, there can be no instances of negative impact on the credit. However, it may affect adversely if the borrowers applies for a much bigger loan compared to the existing mortgage. Short sale is the process when the lender permits the homeowner to sell the assets for less than the balance owed on the loan, so that foreclosure can be avoided. It will be documented as a debt write-off for the next seven years, same as in foreclosure.
In all probability, a home loan modification will surely not affect one’s credit scores negatively. Hence, it is a safe method to clear off debts.
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