What effect does an "SET remark" - settled less than full balance - have on a credit score? I have a good credit score but my lender is requesting to get rid of my adjustable rate mortgage by lowering my loan balance in order to refinance the loan to the lower fair market value. I'm concerned that this will cause serious damage to my credit score although I don't have any other apparent options to refinance out of the adjustable rate due to the current value being significantly below the loan amount (20%).
How a loan write-down would affect your credit score primarily depends on how your lender reports the transaction to the credit bureaus. I strongly encourage you to contact the lender to discuss the write-down offer and inquire about how the lender would report the reduction in your loan balance. While the lender may report some type of settlement, which could negatively affect your credit score, it is also quite possible that the lender will simply report a new loan balance to the credit bureaus, which should have little or no impact on your credit rating. In fact, such a write-down could increase your credit score by lowering your overall outstanding debt amount. Again, you should contact your lender to ask these questions before you decide how to proceed. Even if the lender does report a settlement on your credit report, settlements are not generally considered a significant derogatory item, so it should not have a large effect on your overall credit score. To read more about mortgage loans, refinancing, and other topics of interest to homeowners, I encourage you to visit the Bills.com mortgage resources page at http://www.bills.com/mortgage/.
To be honest, the impact this proposed transaction would have on your credit score should probably not be your primary concern, especially given the potential benefit you could reap from the arrangement. You are in a position to have your mortgage debt reduced by 20%, which would save you a huge amount of money in both principal and interest; the fact that you will be able to refinance from your current adjustable rate mortgage into a fixed rate loan will only increase your potential savings. If the lender’s offer is as straightforward as you describe in your question, your savings will almost certainly justify any possible reduction in your credit score. However, before you decide to proceed with the write-down and refinance plan proposed by your lender, you should carefully review all documents and discuss the plan in detail with the lender to make sure that you fully understand what in being proposed and what are the potential benefits and drawbacks. I also strongly encourage you to consult with an attorney to discuss the lender’s offer to make sure that the proposal is legitimate and that there are no undisclosed terms or costs which could cause you problems in years to come. To locate an attorney in your area who can assist you in reviewing your options, you can contact your county or state Bar Association’s attorney referral service.
As I mentioned, how this account will appear on your credit reports, and thus how it will affect your credit rating, will largely depend on how the lender reports the information to the three major U.S. consumer credit bureaus, Equifax, Experian, and TransUnion. Even if the lender does report your previous loan as “settled for less than full balance,” the listing should not have a strongly negative impact on your credit score, especially since the loan is not delinquent. While a settlement may lower your credit rating by a small amount, the concurrent reduction in your overall debt load resulting from the write-down in your mortgage balance should have a positive impact on your credit profile which may counterbalance any decrease caused by the settlement. You should remember that your mortgage lender may not even report this loan modification as a settlement; rather they may simply report a new loan balance to the credit bureaus with no indication that the reduction is based on a settlement. You need to consult with the lender to discuss how it will report the account so you can better determine how it will affect your credit score. However, as I mentioned previously, you may wish to accept the lender’s proposal regardless of the potential negative impact on your credit profile; the benefits of the large reduction in your mortgage balance should more than outweigh any problems caused by a possible reduction in your credit rating. To read more about credit, credit reports, and credit scoring, I invite you to visit the Bills.com Credit Information & Resources page at http://www.bills.com/credit/.
Hopefully, after you have spoken with your mortgage lender and an attorney, you will be able to take advantage of the principal reduction and refinance offers being presented by the lender. Such an arrangement may allow you to save your home and significantly improve your overall financial prospects. I wish you the best of luck in negotiating a workable agreement with your lender, and hope that the information I have provide helps you Find. Learn. Save.