Lender's Forbearance Or Trial Program Can Hurt Your Credit Score Temporarily

Lender's Forbearance Or Trial Program Can Hurt Your Credit Score Temporarily

Many real estate investors doing or considering loan modification, regardless if you are working with a professional firm or not, do not realize that entering forbearance/trial period can hurt your FICO score, at least temporarily. This happens even if your loan payment was not past due before the trial modification.

Paying as agreed with the lender does not mean the lender stops reporting to the credit bureaus. Up until today, lenders reported mortgage modifications various ways. Some reported them as paid as agreed. But a lot were reporting them as partial payments, which have a very negative impact on a person's FICO score. For example, Wells Fargo reports "paying under a partial payment agreement".

There is good news though. Once trial modification is completed and permanent modification is approved, some lenders will start reporting the loan as current again, which will restore most of the FICO score reduced previously.

Consumer Data Industry Association, which represents credit bureaus, started to issue guidelines for lenders to follow a new, more benign way to report loan modifications. Initially the guidelines are for government-sponsored loans only and eventually a more comprehensive reporting system will be developed.

FICO - the leading provider of credit scores - will ignore this new reporting for the time being. It will neither help nor hurt a person's credit score until FICO decides how to treat it. FICO always prefer having at least a year's worth of performance data before making any changes to its credit-scoring formula.

As a real estate investor, your best bet for now is to ask your lender to report your account current once your loan modification is approved. The lender can also apply them retroactively at its discretion so be sure to ask nicely. We will keep you abreast of any progress made by the credit bureaus and FICO.

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