debt

Mortgage modification may be credit downer

Steve Bucciq_v2.gifDear Debt Adviser,
I have a question in regard to debt. My wife and I are currently in the process of modifying our mortgage. However, as soon as we started the modification process, our credit card limit was reduced significantly. Will a mortgage modification affect our credit? If so, for how many years?
-- Jes

a_v2.gifDear Jes,
I know how you feel. Based on detailed scientific observations over a number of years, I know that washing my car causes rain. The link between the two events seems irrefutable to me. Similarly, the link between a need to modify your mortgage and decreases in other credit lines may look like a clear case of cause and effect. Actually, I think that if you look a little deeper, you'll find there is a bigger force at work here.

The same conditions that have caused you to need to modify your home loan are at work on your credit overall. A horrible economy, large lending losses and an uncertain future have everyone trying to insulate themselves from what I call a credit winter by tightening their belts and doing what they can to reduce risk and further losses. You are modifying your loan; bankers are cutting credit lines and raising interest rates.

Let me suggest that you find out for sure what is affecting your credit by reviewing your credit reports. You can get free copies annually from the three major credit bureaus at AnnualCreditReport.com. Because you are in the process of modifying your mortgage and have not completed the process, my initial reaction is your credit card limit is being reduced due to environmental issues and not because of your modification.

However, if you are modifying your mortgage because you could not make your mortgage payment and paid late once, twice or more, then your credit card limit may have been decreased due to that negative activity on your credit report.

Looking at your credit reports will tell you how your mortgage loan is being reported. The modification, once completed, may negatively affect your credit score. It all depends on how the lender reports the change. For example, if the modification is considered a new loan and your principal was decreased, the lender may report your original mortgage as "settled" or "charged off," which would be a fairly big negative for credit scoring. But if by modifying the loan you are avoiding a foreclosure, then you are avoiding a much larger negative entry on your credit report that would be far more devastating to your credit.

If the modified loan is not considered a new or settled loan by your lender, then the only negative affect on your credit associated with the modification should be any late payments you made on the loan. I suggest that you have a chat with your loan underwriter about how they will be reporting your modification and ask for your answer in writing so there is no misunderstanding.

Should you end up with a negative entry on your report due to the modification, it's not the end of the world. Although the negative data will stay on your credit report for seven years, it will decrease in importance with every month that passes. New positive payment information can stay on your record for much longer and will help rebuild your credit usually in a year or two. Finally, be aware that credit may continue to tighten, meaning you will need a better credit record than usual to keep your credit lines in place. This will make saving for that rainy day or emergencies all the more important.

Good luck!

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