As U.S. consumers try to dig their way out of the worst recession in decades, many have sought help from their lender; but requesting a loan modification may be financial suicide. Unfortunately, many struggling homeowners often find the “cure” to be worse than the illness. An article in the SF Chronicle points out how a loan modification not only lowers credit scores, but often leaves the borrower owing thousands in fees and penalties if the modification is denied.

When a homeowner is accepted for a trial modification, their payment is lowered below the original contract amount, and their lender will report them as delinquent to credit reporting agencies. The negative credit reports, combined with a lowered FICO® score, bring additional problems. After enrollment in modification programs, many homeowners find themselves with lowered credit limits and higher payments on existing credit accounts due to a sometimes dramatic increase in interest rates. For many, it’s the proverbial “nail in the coffin,” that eventually drives them to foreclosure.

Additionally, both lenders and consumers seem confused about the “requirement” that homeowners be delinquent on their mortgage payments in order to be eligible for a modification. With a number of lenders advising homeowners to intentionally miss payments in order to increase their chance of approval, what they fail to tell the homeowner is that missed payments will result in an immediate lowering of credit scores. Although some lenders have denied making such suggestions, the number of reports to the contrary seems to indicate that many in the industry remain uncertain of the rules.

And while, the article doesn’t suggest that homeowners not apply for a modification, it does offer suggestions on how lessen the negative impact to credit scores and increase the benefit of modification. One suggestion is to keep paying the original payment amount during the trial period if possible, and to make certain that payments continue to be made as scheduled.

The current recession continues to create hardship for millions of homeowners; and consumers should be aware that requesting a loan modification may be financial suicide unless measures are taken to lessen the impact.

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