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Thinking about signing up for the government’s mortgage assistance program to help ease the burden of your home loan payments? Well, you may want to reconsider before you sign on the dotted line, as more and more people are finding that help comes at a high price: a decreased credit score, sometimes down by as many as 100 points.
It’s a move that caught homeowners and housing counselors off guard. Many who were hoping to use the program are now crying foul on the nasty surprise, wondering why a program that was designed to help homeowners instead damages people’s credit scores even when they’re still making their monthly payments, but are on the verge of default.
How does this affect borrowers?
In order to enroll in Obama’s “Making Homes Affordable” program, potential borrowers first enter a trial period where they’re required to make at least 3 payments. And it’s during this trial phase that many are finding their credit scores start taking a nosedive, often as soon as mortgage companies notify the 3 major credit bureaus – Experian, TransUnion, and Equifax – of the loan application. To the bureaus, a borrower requesting a loan modification has entered the first stages of financial difficulty, and so signals the drop in credit score.
With that said, it’s no real surprise that the credit rating industry is defending the practice, arguing that people wouldn’t be signing up for these services in the first place if they weren’t already in a major financial bind. Members of the Treasury Department agree as well, acknowledging that while enrolling in the program can hurt one’s score, it’s better than the alternative – a foreclosure.
And that’s actually true. As bad as the penalty on the loan assistance program is, a foreclosure can have a much more severe and lasting impact on your credit history, dragging your credit score down by more than 150 points. Coupled with the history of late or missed payments, foreclosures alone can leave your credit history in shambles.
Still, a heads up on the hit your score takes for using the program would’ve been nice, instead of sneaking it in there and not saying a word about it.
How to avoid the credit hit
For some, the mortgage assistance program may seem like their only option to get their mortgage payments back in line. The bad news is, if you are ruled ineligible for the program, not only will you not get the loan, your credit score will have taken the hit anyway, leaving you having to worry about credit repair as well.
Those who are accepted into the program and manage to get their loans modified permanently will have their statuses updated by the lenders. This new status neither helps nor hinders their credit score. If that doesn’t sound like a hit you’re willing to take, your best bet is to continue to pay your bills on time and using your credit wisely, and your score won't stay down in the slums for too long.
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