Home Loan Modifications and Your Credit Score
A Home Loan Modification can help you stop foreclosure and stay in your home. But if you’re like most homeowners, you’re probably wondering how it will affect your credit, and whether in a good or bad way. Unfortunately, there’s no single answer–it all depends on how far behind you are and the kind of mortgage loan modification you’ll be granted.
Best-case scenarios
Technically, since you’re not borrowing any money, a home loan modification won’t hurt your credit score. If you’re paying less in interest, you have a smaller debt burden. And since most lenders prefer an interest rate reduction, there’s a pretty good chance that a Home loan modification will improve your credit score.
The implications are even better if your lender forgives part of the principal, although this is less common. If they write off $50,000 from your loan amount, it will show up on your report as a smaller loan, which can increase your credit score.
The lender factor
Unfortunately, it doesn’t always happen that way. It also depends on how your lender reports the home loan modification to the credit bureaus. Many of them will consider it paid for less than the original amount owed, which will count against your score. If you’re already in foreclosure, the impact on your credit can be substantial. Of course, compared to a short sale or a foreclosure, a Mortgage Loan Modification is still the best way to maintain your credit standing.
Tax implications
One of the early problems with Loan modification is that the amount forgiven is usually taxable. That means if your debt is reduced by $50,000, the IRS views it as income and imposes the corresponding tax. This can catch homeowners off guard during tax season, as many of them don’t know the tax implications at the time of the modification.
To avoid such incidents, the IRS announced in 2007 that Loan modification would no longer be classified as “prohibited transactions.” This applied to all loans originated from January 2004 to July 2007, the peak of the sub-prime boom, and those due to adjust from January 2009 to July 2012. If your mortgage falls under these categories, you won’t have to file a 1099 declaring the change as taxable.
A loan modification is much like going to court: you can save your money and get a court-appointed lawyer, or you can invest in professional representation and get the best mortgage assistance. Your loss mitigation won’t happen overnight, but if with a capable Loan Modification Attorney, you can be sure you’re in good hands.
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Help answer the question
what is the risk borrowing home loan from a small and new bank?
I am having a traditional loan application with a big bank. I just found a small bank in Florida, founded in 2004, is offering better rate and cost compared to those big famous banks. The small bank is member of FDIC. Somebody told me small bank may not follow federal regulations. How do I tell if a bank is a qualified home loan lender that follows all lending regulations? What is the risk borrowing home loan from a small bank?
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Tags: Home Loss Mitigation, Loan Modification Attorney, Loan Modification Firm, Loss Mitigation, Loss Mitigation Foreclosure, Loss Mitigation Services, Mortgage Loss Mitigation, RVCap14, Short Sale
This entry was posted on Monday, September 28th, 2009 at 5:13 am and is filed under Loan. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
September 28th, 2009 at 6:12 am
hello! sounds like we are in a little predicament here with the payments, with a 600 credit score it makes it so we can not go with a "stated loan" which is too bad, and with the x-wife continuasly making late payments you are correct, you will not be able to make your payments on time. i had just recently dealt with a few divorce refinances where the x husband was required by the court to get the place refinanced into his own name, and she was required to do the same with the properties she got to keep, it is probably too late for this now.
i'd say FHA but your expense ratio is probably going to be too high. you may be able to find a lender that can get you into the 9's. do you have any other bills besides your Mortgage? credit cards etc…. bank statements would definately be your best bet…… if husbands paychecks all go into the same checking as yours. send me a message if you'd like to see if there are any options. i've had people get denied by 3 or 4 people than come to me and i've found a home for a beneficial loan to them. i'd love to help, or help steer you in the right direction.
September 28th, 2009 at 6:15 am
David, this is an investment property. You can short sale it, but you will still owe the rest of the money. The only way to not pay them back is to file bankruptcy, which will not likely be possible since you own other assets that can cover your loss.
This is not your primary residence, you will receive no special treatment.
September 28th, 2009 at 6:26 am
It won't hurt your credit score because you are not actually borrowing any money, you are just refinancing. In some cases it may actually help you credit score. Example your first loan was for 200K, you've paid off 50K, your new loan will be for 150K, that means your loan amount is smaller, and better for your credit. Also it will show on yor credit score that you paid off a loan. I just refinanced with a no closing cost loan( you pay a higher APR, but you will not pay any closing cost. ) I am paying 6 1/4, it's probably even lower now. The fed is supposed to lower it again, so I would wait a month or so to see what happens,
September 28th, 2009 at 6:47 pm
As a secured creditor, your lender will not be affected by bankruptcy. the only decision the bankruptcy judge has to make is if there is enough equity left after paying the mortgage for the other creditors to fight over.
You can always reinstate the mortgage by making up the back payments.
Otherwise sell the property. The foreclosure will take many months. Use the profits to make a new start. Reduce your cost of living and repair your credit.
September 29th, 2009 at 4:50 am
As I understand it, the only people who can obtain a mortgage loan modification are those in the foreclosure process…..and even then it is not offered to everyone, depending on the circumstances.
September 29th, 2009 at 10:42 pm
Just because your collateral is gone does not let you of the hook for that second mortgage. You took the money from that second mortgage company with the promise to pay it back. Now they expect you to pay it back. Your credit record will not improve until you become current on this debt and bankruptcy certainly won't help to improve it. I hope the new job was worth it. Learn from this. No more home equity loans or second mortgages. If you can't afford to buy something without taking such actions you can't afford the item.
September 30th, 2009 at 3:16 pm
Our reward is: We have the privilege of paying for the idiots who purchased homes they couldn't not ever afford. Aren't we lucky!!!
September 30th, 2009 at 4:35 pm
Banks don't seem to be very excited about doing loan modifications. Even though it's not in their best interest to foreclose on the home, I bet there are many more foreclosures each day than there are loan modifications. I've got a lot of foreclosures for sale (I'm a Realtor) that were from HSBC so I'm guessing the answer is no.
Have you considered a short sale?
October 1st, 2009 at 6:39 am