Mortgage Modification & FICO Score Damage
Home Loan Modification & Hardship Letter Help
Our credit scores have become much more than simply a financial reward for prudent use of credit. With the information explosion of the past 25 years, credit scores have become a measuring stick used by prospective employers, insurers, private investigators, marketers and lenders of all types. Further, during the economic run-up of the past 7 years, a person’s FICO score became a status symbol of the new “real estate wealthy class”.
And so, it is with great trepidation that many of us face the untenable prospect of trashing our good credit standing by missing payments as part of a real estate “workout” with the lenders. But, tough times require tough decisions by tough people.
And, like in any impending “emergency” we can minimize the damage and speed the recovery by understanding it and preparing for it. Specifically, you should know: 1) how the credit rating system works, 2) how much damage will be done by a mortgage late payment, short sale, deed-in lieu, foreclosure, and bankruptcy, 3) street-smart ways to minimize the damage and 4) street-smart ways to speed our recovery.
What’s your credit “Heritage”?
For many of you this dip into poor credit is a first-time thing and you hate it. You’re the lucky ones. Your displeasure will propel you back into 700+ FICO range within 24 months. Your good habits and the street-smarts will control your actions in the coming months, reaping you financial rewards and renewed peace of mind.
For others, bad credit has been an ongoing issue – like a bad penny that just keeps turning up. No matter how much you try to avoid it you seem to slip back into it periodically. Like chronic dieters, you keep reverting to doing exactly what you don’t want to do. You’re frustrated.
You probably often give up trying and just tolerate the financial limitations, frustrations and occasional embarrassments that come with poor credit.
Such folks face the biggest challenge of adult life – changing habits. It’s not nearly enough to want to improve your credit score…although that’s an important start. Financial habit-changing requires all the psycho-social support that any major habit changing effort does. It is beyond the scope of this chapter, but it’s a topic that I am passionate about.
Minimize the Damage
Most of my clients miss 3-5 mortgage payments and most suffer at least a 100-150 point FICO decline. My own score dropped to 550! Not fun, not financially rewarding, and not something to be proud of. But,…well you know.
It’s important to know that the FICO scoring formula is a “predictor” of future credit performance. It’s not meant to reward or punish, but rather to predict the likelihood that someone will pay their bills as agreed over the next few years – based solely on the information in a credit report. It is, therefore, complex and difficult to accurately assess (and it is a carefully guarded secret).
When looking at late payments, the FICO scoring formula considers the information on a credit report by 1) Recency, 2) Severity and 3) Frequency. In your default situation you cannot control the severity (mortgage lates are severe) and the frequency really depends on how fast your lender responds with a reasonable workout plan. Recency is THE issue that you should focus on. Delay the credit damage as long as possible and then get it over with as quickly as possible.
Speed the Recovery
Seven Credit Repair Best Practices will help you to recover faster. These are measures that should become part of your ongoing financial management. Now is a great time to implement them and develop them into habits.
Never make a payment late again. Take this seriously and figure out how to get your payments in on time, every time.
Never close any credit accounts and use all credit accounts. You’ll not improve your credit score by avoiding the use of credit. Don’t let any accounts lie dormant, even if you have to go to Sears to buy laundry detergent on their card!!
Open new accounts only after careful evaluation and for specific smart purposes. You may (if you have 4 or fewer credit cards) want to open a new credit card account to raise your total available credit limit. Having more than 4 credit cards is not advisable.
Constantly apply for higher credit limits with your existing accounts. Using only a portion – a low percent – of your available credit is beneficial. This will be especially challenging in this economic downturn. In fact, many credit card companies are reducing credit lines in an attempt to reduce their exposure.
Make payments on every account 2X per month. You get FICO benefits for making a payment AND for paying your required amount each month. So you’ll get additional benefits by paying half the total, twice per month. If your cash flow doesn’t allow this, then make at least a minimal additional payment each month to get the benefit.
Pay down your non-secured accounts (such as credit cards) to 30% of your available balance and keep using the accounts frequently. Don’t let them exceed 30% ever again. This is the very best use of any monthly savings from missing mortgage payments…get these balances low!
Hire a reputable credit management company to dispute your credit report negatives. Don’t even THINK of doing this yourself. I know this advice flies in the face of my usual “do-it-yourself” mantra. However, my experience is that this process (disputing) is an essential part of credit repair and it’s WAY beyond the ability, patience, or capacity of mere mortals.
I’ve NEVER had a client succeed in removing all they needed from their credit report, even using the online dispute services offered by the three bureaus. It’s costly to use a credit repair company, but well worth it.
If you implement these practices, you’ll fully recover from any FICO reduction in 6-24 months. Track your progress by checking your FICO score at FairIsaac.com for about $15. Expect it to take at least 6 months for significant progress.
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