By Kenneth Long on March 30, 2010
Many homeowners who can no longer pull equity out of their homes are looking for other ways to manage their debt. One option that many are seeking is a loan modification, which restructures the terms of your mortgage to allow for a reduction in your monthly payment.
Loan modification is designed to be a lifeline for when you would otherwise fall desperately behind on your house payments. It is an emergency measure to help you avoid foreclosure. It is not for homeowners who can afford their monthly payments, since eligibility guidelines generally require that you are already behind in your payments.
According to Fair Isaac (developer of FICO credit scores) spokesperson Craig Watts, partial payment trial modifications can drop a credit score 50 points. Lenders report these reduced payments as "partial payments." This can really lower a credit score that has already been hit by late payments.
If you are already behind and at risk for foreclosure, then loan modification might be necessary to help you stay in the home. Even if the partial payments adds another negative to your credit report, this negative would be offset by bringing the loan current again, which loan modification helps with.
In the end, you should reserve loan modification for what it is intended. It is a desperate measure to help you stay in your home when you would otherwise lose it to foreclosure. It can be useful for families that have experienced a recent reduction in income. However, it is not a means for lowering your monthly payments because you have been overspending in other areas.
Consider what the problem is. If your mortgage loan has difficult terms that you cannot meet such as a very high interest rate, then loan modification might deserve a second look. If you are simply trying to lower your monthly debt obligations because you are also trying to make high car payments and owe thousands on credit cards, then the home is not the problem. You might want to talk with a credit counselor to see if debt management can help you.
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