Borrowers who wish to take advantage of the Obama Administration's Making Home Affordable mortgage relief program may find an unintended consequence: a hit to their credit scores. However, many factors affect the severity of the impact, and it is possible to improve your score over time. If you're struggling with your mortgage, don't let possible damage to your credit score stop you from considering these options.
HAMP
According to the Making Home Affordable website, the Home Affordable Modification Program, known as HAMP, will affect your credit. However, the extent to which your credit is affected depends largely on your personal financial history. If you have pristine credit and haven't missed any payments so far -- but are about to become delinquent -- you'll take a bigger hit, according to the St. Petersburg Times, possibly as much as 100 points. However, if you have several "lates" on your credit, the modification won't affect you as much. FICO, the Fair Isaac Corporation, worked with the federal government to develop a new description to assist homeowners participating in HAMP. Instead of noting payments as "partial," HAMP homeowners will have their mortgage accounts noted as "modified under federal government plan."
HARP
HARP, short for Home Affordable Refinance Program, allows homeowners who have Federal Housing Authority-backed mortgages to apply for a reduced interest rate. HARP does not affect credit, and does not depend on your current credit score. Applicants must be current on their loans. Although homeowners can refinance up to 125 percent of the home's value, they may not "cash out" or use the extra funds to consolidate debt. The additional 25 percent accounts for property value depreciation since the loan -- or loans -- was originated.
The Rationale Behind HAMP and HARP
According to the St. Petersburg Times, Treasury spokeswoman Meg Reilly noted that borrowers attempting to secure HAMP approval represented a material risk for lenders, and that risk should be reflected in the borrower's credit profile. Remember that under HAMP, original loan terms have been changed to suit a borrower's financial condition, similar to credit counseling. HARP, however, is a simple refinance program that works like a non-government sponsored refinance. The difference is that HARP applicants may borrow 125 percent of the home's value, and credit scores aren't a factor in the approval process; conventional borrowers hoping to refinance won't find these terms available to them anymore.
Understanding Your Credit
Borrowers who are concerned about a precipitous drop in their credit scores must remember that the FICO score is only a "snapshot" in time, according to FICO's website. Although many consumers believe that bad credit is a stain that can never be washed away, that's a myth. Making on-time loan payments -- especially on a mortgage, the best type of credit -- and keeping credit card balances low keeps 65 percent of your credit score happy. Your score could be as high as was prior to a modification in as little as a year. Unless you're applying for a loan, a slightly lower score won't cost you money, but government assistance will save you tons.
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