Loan Modification

When market conditions change, you may want to improve your loan terms and get better rates. Especially with mortgages, even small rate improvement can mean thousands of dollars saved on interest payments. More often, the decision to enter a loan modification program is out of necessity, and may be your only option to avoid car repossession or home foreclosure.

Mortgage Modification
A mortgage modification alters the terms of your existing home loan. Potential changes include adding any past due charges to your principal balance, deferring missed payments to the end of the loan, better interest rate, stretching the payment schedule to allow lower monthly payments or changing the loan type from an adjustable rate mortgage (ARM) to a fixed rate.

In some cases, the mortgage companies report the mortgage modifications to the credit bureaus, and a ‘Partial Payment Arrangement made‘ status may appear on your credit report.

Often, prior to getting a permanent modification the lender may decide to do a trial modification for six months. During this trial period the mortgage company may report your lowered monthly payments to the credit bureaus as “Partial Payments” or “Rolling 30-day Late Payments”, because you are not paying the original amount and the modification has not yet been made permanent.

Depending on your credit status prior to entering the mortgage modification program (current or delinquent) the ramifications for your credit score will differ. Those who were current on their mortgages could see their scores knocked down 80 – 100 points. On the contrary, entering modification could benefit seriously delinquent borrowers’ credit scores as it means resuming payments.

Once the modification has been made permanent, some lenders may report your status to the credit bureaus as “Current”, which will benefit your credit status.

Auto Loan Modification
As with a mortgage modification, in many cases the lender reports the car loan modification to the credit bureaus, and a ‘Partial Payment Arrangement made’ status may appear on your credit report.

Depending on your credit status prior to the auto loan modification (current or delinquent) the ramifications for your credit score will differ and your score may fall up to 100 points.

Can you do something to avoid this?
Unfortunately, the answer is no. While saving thousands of dollars may be worth losing 80-100 points off your score, there’s absolutely nothing you can do about it. The decision is yours.

The ONLY way to “fix” this is by making timely payments and avoiding additional negatives. You’ll need at least 24 months of consistent timely payment history to improve your score and get it back to where it was prior to the loan modification.
Loan Modifications Scams
Especially with auto loans, you need to know that many of the companies that advertise auto loan modification for a fee are in fact a scam. In many cases, consumers find themselves later with ruined credit, owing more money in late payments and legal fees. Here is a warning issued by the Federal Trade Commission (FTC) about these companies:

If you’re having trouble paying back your car loan, you may be thinking about contacting one of the companies that claim they can reduce your monthly car loan or lease payment and help you avoid repossession.

These companies usually charge upfront fees of several hundred dollars. They bolster their claims to be able to significantly lower your monthly payments with glowing testimonials from “satisfied” customers. Some even say that they’ll refund your fee if they can’t make a deal with your lender.

While these promises sound like a good way to get out from under, the truth is that it’s smooth talk by scam artists who are out to take your money and provide nothing in return. In fact, the FTC recently sued companies that made claims like these but failed to deliver the auto loan modifications they promised or honor the refund policies they “guaranteed.” In many instances, the companies never even contacted any lenders or did anything for their customers.

Victims of these auto loan modification scams tell the same story: After paying a fee for the promise of a loan modification, nothing was done to secure the promised results. The scam artists often compounded the problem by telling their clients to stop making their car payments while the companies claimed to be in negotiations with lenders. The victims learned that the companies hadn’t done anything only after their lender contacted them about repossessing their vehicle, or after finding their credit was ruined because of missed payments, charge-offs, collection accounts and repossessions.

In some instances, the scam artists even demanded additional fees to continue working on their client’s cases!

What to do if you’re behind?
If you are having trouble making your car or home payments, contact your lender directly to discuss your options as early as you can. The longer you wait to call, the fewer options you will have. Sometimes, if delinquent payments have already been recorded, your credit score has already dropped significantly and you may not qualify anymore for a loan modification program!

Typical loan modification involves either deferring missed payments to the end of the loan or extending the loan term to reduce monthly payments. While this choice actually increases the total amount you pay in interest, even with a lower interest rate, it may be your only option to avoid losing your car or home!