This is one of the most hotly debated topics in consumer credit, mortgage, and loss mitigation circles. The short answer is yes, and no. However, I think you want to hear a better explanation. According to some consumer advocates, loan modifications have no adverse effects on your credit scores. Of course, they put an asterisk next to their statement because they really don’t know. Other reports show that many of the large lenders and mortgage services are using special codes to indicate that a client is paying a modified payment.
Recently, I spoke with a representative from Equifax. She did not want her name disclosed for privacy reasons, but she stated that some of the big banks are using a special code of “AC”. Even with my vast knowledge of credit reporting, she had to refresh my memory to what an “AC” is. Basically, the “AC” code indicated that a borrower is only making partial payments on their debt. The result would be credit scores being dramatically lowered. In this light, many creditors will cut back your lines of available credit.
Another interesting thing is that if you ask 99% of the mortgage lenders, they will state that they never take “partial” payments. Many of my clients have attempted to pay a half or less than a full mortgage payment. In all of these cases, the lender has turned around and sent the un-cashed check back to the client. They also received a letter informing them that their payment was not accepted because the bank does not accept “partial” payments.
I pressed the Equifax employee for a better explanation. If a lender does not take partial loan payments, why would they be allowed to report that a consumer was only making partial payments? Needless to say, I think she was caught off guard by my inquiry. After a few moments of silence, she stated, “well, we (the credit reporting agencies) do not tell creditors how or what to report.” In essence, your lender can report anything they want to the big three credit reporting agencies.
With this information, let us discuss how this impacts you.
If you are current on your mortgage and have not made a late payment within the last 12 months, the “AC” code can do some damage to your credit scores.
For the current customer with strong credit scores, my advice is to take a serious look at whether or not you want and/or need a loan modification. If you are comfortable making your mortgage payment and you just want a lower rate and payment, you need to assess the pros and cons. You might not want a hit to your credit, so you will need to forgo applying for and accepting a mortgage modification offer. If your finances are really tight and you are squeezing every penny out of your budget to make your mortgage payment, you might just want to suck it up; accept the modification and take the negative bump to the credit.
Remember, time heals all wounds. So, if your credit scores drop due to a mortgage modification, you can make up for this by having an outstanding pay history over a relatively long period of time. On time payments, definitely have the most positive influence on your credit scores.
If you are a customer that is behind on your mortgage and/or you have had a 30 day late payment within the last twelve months, the “AC” code is not going to affect your credit score. Your credit has already taken a dramatic blow, so any additional drop caused by this type of credit reporting is not going to have much bearing.
For this consumer, you obviously need some sort of mortgage workout. My advice is that you apply and obtain a mortgage modification. Then, pay your new modified mortgage payment on time. Once you do this for at least twelve months, your credit score will increase and overcome any negative reporting by your mortgage lender/servicer.
As with any issues, things just are not black and white. Grey seems to rule the day, and each customer needs to go into any financial transaction with their eyes wide open.