Financially stressed homeowners looking to cut their mortgage payments through a loan modification, short sale or principal reduction under one of the Obama administration's programs needn't wreck their credit scores in the process.
In fact, according to a new study covering more than 400,000 active consumer credit files, some modification options can actually increase your score rather than depress it. Other alternatives to modification - such as foreclosure and bankruptcy filings - can tank your score and take years to rehabilitate.
The study was conducted by VantageScore Solutions LLC, a joint venture created by the three national credit bureaus - Equifax, Experian and Trans-Union. The "VantageScore," now being used by growing numbers of mortgage lenders and banks, is designed to be an alternative to the long-dominant FICO score.
The VantageScore scale runs from 501 to 990, with low scores indicating high risk for the lender. FICO scores run from 300 to 850.
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The two scores show roughly similar impacts of loan modifications, short sales, foreclosures and bankruptcies on consumers with similar credit histories, says Sarah Davies, VantageScore Solutions' senior vice president. The 400,000 consumer files in the study were scrubbed of all personal identifiers to preserve privacy.
Some of the most frequently used mortgage modification strategies turn out to have relatively minimal negative impacts on consumers' scores, the study found.
For example, people with excellent scores at the time of a loan modification - those who've paid their mortgage and other credit accounts on time - might find their score depressed by 30 to 40 points after a modification that involved deferral of payments for a period of months.
The same consumers could see a small net gain in their scores - about 10 to 30 points on average - if their lender modified their loan by forgiving 10 percent of the balance owed and chose not to report that forgiveness as a charge-off to the credit bureaus. If the lender reports a charge-off, however, their score could drop by 100 points or more.
Modifications involving what lenders call "recapitalizations" - rolling delinquent payments and fees into a new balance typically carrying a more affordable interest rate - can also increase scores modestly, the study found.
On the other hand, homeowners who do not pursue - or whose lenders do not grant - modifications can end up in short sales, foreclosure or bankruptcy with major hits to their scores.
VantageScore's simulations of scoring scenarios also examined how quickly homeowners could bounce back from one or more negative events connected with their mortgage.
The results should be encouraging for consumers who manage to get current on their loan payments following a modification.
For example, in the case of delinquent borrowers who started with a score just above 600 and saw it drop by more than 100 points after a significant restructuring of their loan terms, their score can rebound to 700 in nine months - provided they make on-time payments on all accounts.
Contact syndicated columnist Kenneth Harney at kenharney@earthlink.net