Bloomberg recently published a report that the government's Home Affordable Modification Program may result in an unexpected drop in credit scores. The article cited one consumer whose credit score dropped 59 points. That's not as bad as the results of a foreclosure, but it's still bad and it may surprise some home owners.
The Home Affordable Modification Program began in March to reduce payments for owners who are either deliquent or near default.
A representative of FICO stated that a loan renegotiated for less than the full amount is a negative because past experience shows that people on reduced payment plans are a larger risk. People with high credit scores will probably suffer more from this action. The consumer cited states that his credit card limit was dropped from $15,000 to $500 as a result of the decrease in his score.
Lenders want to know that potential borrowers had to have loans modified in order to keep current according to a Bankrate.com representative. They view it as fair since the borrower wasn't able to abide by his original agreement.
Those seeking a loan modification need to know if the modification is through the government program or their bank's internal program and how it will be reported on their credit rating.
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