The Making Home Affordable Program Can Lower Your Credit Score

On the surface, the Obama Administration's Making Home Affordable program appears to be a feasible way for struggling homeowners to not lose their homes due to foreclosure. Unfortunately, what many of these homeowners are not realizing is that participating in the program can adversely affect their credit scores. In some cases, homeowners have seen their credit scores drop by 100 points after enrolling in the Making Home Affordable loan modification program (1).

The Obama Administration's Making Home Affordable program was instituted so that homeowners who are having trouble keeping up with their mortgage payments could negotiate for lower payments in lieu of going into foreclosure. The requirements of this program are the following: the mortgaged home is the primary residence, the mortgage amount is less than $729,750, the mortgage was obtained before January 1, 2009, and the total mortgage payment now exceeds 31% of one's gross income. Making Home Affordable applicants must also prove that they have suffered a reduction in their work earnings or other income due to job loss, illness, injury, or some other cause.

Because major credit bureaus such as Equifax, Experian, and TransUnion view participants in the Making Home Affordable program as being in imminent danger of foreclosure, these participants have had their credit scores dropped. Even if these individuals were not delinquent homeowners and had never had trouble making their mortgage payments until now, credit bureaus viewed them as being in danger of delinquency to the point of requiring government assistance.

Another issue that has come up under the Making Home Affordable program is that participants who notify their mortgage lenders of financial difficulty often enter into a "Trial Period Plan", during the time that their home loans are modified. During this trial period, some lenders will actually report the loans as being delinquent, even if the homeowners are making their trial period payments on time (2). There is no information provided about how long the trial period will last. Since every delinquent payment results in a sequential loss of credit rating, homeowners making so-called "delinquent" payments on their mortgages could see a hefty drop in their credit scores despite paying their bills on time.

Fortunately, the U.S. Treasury has worked with FICO to change the credit reporting on participants in the Making Home Affordable program. Prior to November 1, 2009, a person obtaining a loan modification was reported as being a "partial payer". This could be interpreted by some credit bureaus as incomplete mortgage bill payment, or delinquency. Since that time, FICO has agreed to categorize Making Home Affordable participants under "Loan Modified Under a Federal Government Program" and wait until the middle of 2010 before recalculating their credit scores. By doing so, the hope is that those who keep up with their reduced mortgage payments should see their old credit scores remain about the same.

References:

1. Making Home Affordable program puts dent in credit scores

http://www.tampabay.com/news/business/realestate/making-home-affordable-program-puts-dent-in-credit-scores/1064148

2. Credit History Reported Delinquent During Making Home Affordable Loan Modification Trial Period

http://www.thinkglink.com/article/2009/08/13/credit-history-reported-delinquent-during-making-home-affordable-loan-modification-trial-period