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.
VantageScore measures the generic consumer’s credit score and his or her likelihood of slipping into 90-plus day delinquencies on a scale of 501 to 990. Three of the top 10 loan originators and eight of the top 25 financial institutions in the industry use VantageScore’s services.
If a servicer reduces a consumer’s original loan amount from 10-to-30%, the consumer’s credit score is only increased by three to 18 points, depending upon the consumer’s initial standing. 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 can 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.
“Delinquency on a mortgage account has a far greater negative impact to credit scores than loan modifications,” Davies said.
Loan modifications cause a small change in the score unless the lender establishes a new loan as part of the restructure. Credit scores take the biggest hits from short sales, foreclosures and bankruptcy, but if a consumer can bring delinquent accounts to a current status, his or her score can recover in as little as nine months, Davies said.
“When you can, let’s avoid bankruptcy,” Davies said.
Write to Jon Prior