Are loan Modifications the way to go?

The government should be applauded for its efforts to keep people from losing their homes, but there is a side of the Obama administration’s Making Home Affordable loan-modification program that few people are considering: Modifying a home loan may make it necessary for consumers to rely on bad credit loans if they want to borrow money for a car in the future. Susan Tompor, a columnist for the Detroit Free Press, wrote in late 2009 that homeowners who successfully apply for a mortgage loan modification under the Obama program can see their credit scores take a dip. If that dip drops their credit scores lower than 620, these homeowners may have to turn to bad credit loans if they need to finance a purchase within the following year or two.

Bad Credit Loans


Bad credit loans aren’t necessarily a bad thing. Many people rely on them every year to buy homes or cars. Not everyone has perfect credit. Many consumers have missed payments in the past. Others have even had collection agencies calling their homes. Bad credit loans give these consumers the chance to own a home or car. However, bad credit loans generally cost more than do conventional mortgage or car loans. That’s because lenders charge higher interest rates for these loans. It’s a way for them to protect themselves in case the borrowers applying for these loans default on their payments. It makes financial sense, then, for borrowers to take the steps necessary to keep their credit scores high enough so that bad credit loans aren’t their only options.

Making Home Affordable

The Obama administration’s Making Home Affordable program offers financial incentives to mortgage lenders and banks to persuade them to work with struggling homeowners. The goal is to modify the mortgage loans held by these homeowners so that the homeowners can afford to pay them. This prevents homeowners from losing their residences to foreclosure. The problem is, receiving a mortgage loan modification is counted as a negative by the three credit bureaus — TransUnion, Equifax and Experian — that compile credit reports on consumers. This lowers homeowners’ credit scores, making it more likely that they will have to rely on bad credit loans next time they need to finance a large purchase.