Mortgage Modifications ‘Insignificant’ to Credit Scores: VantageScore

Restructuring plans on a mortgage, whether in the form a forbearance, modification or short sale, have a relatively insignificant effect on the consumer’s credit score, said Sarah Davies, vice president of VantageScore, at the Loan Modifications Conference now underway in Dallas, Texas.

A restructuring wherein a lender reduces the principal balance can actualy serve to RAISE someones credit score. If a servicer reduces a consumer’s original loan amount from 10-to-30%, borrowers in the top-tier of credit scores, averaging an 862, receive only a three-point increase. Lower tier borrowers, in the 625 range, can receive an 18-point jump.

The credit score increases because the total amount of debt owed is reduced, and the borrower becomes more reliable – and risk deflates, Davies said.

However, foreclosure and bankruptcy  more severely affect the consumer’s credit score. If a borrower, who maintains good credit, is foreclosed, his or her credit score can decrease by as much as 140 points. Bankruptcy for someone in good credit standing results in a reduction of 365 points from the consumer’s credit and a mark on the file for seven to sometimes 10 years, Davies said.

When you can, avoid bankruptcy. And a short sale, negotiated professionally, can go a long way to helping someone avoide having to file bankruptcy.