Should you hurt your credit score to get a mortgage work-out?

Now that mortgage rates are low what does it take to refinance your home? A recent analysis by Inside Mortgage Finance found that the average score for borrowers whose loans were sold to Fannie Mae and Freddie Mac was 748 out of a possible 850. Clearly many borrowers with impaired credit will not be able to refinance as lenders are unwilling to part with money to refinance the credit-impaired sector. The problem is a two-pronged issue that often requires borrowers to hurt their credit before a work-out is considered.

Most work-outs result in nothing more than a technical change that puts past due amounts on the back end of the loan. Then the subprime pixie waves the magic wand and the homeowner is current again. The borrowers credit score is lower because lenders will not do anything until the situation demands attention.

Should you willingly harm your credit score to get the attention of your mortgage company? If a workout is needed only to stop the phone calls, with no real solution in mind, then the answer is no. In reality if you are asking the question you must consider whether or not you will lose the home in the future. The real question is not whether you will hurt your credit score, but whether you want to throw money at the problem.

Years ago predatory lenders said people would do anything just to keep their home and their automobile. Today – and this is important – the Fed and major banks say the same thing. What does that tell us about the state of banking? A moot point, but changes in bankruptcy laws to assist homeowners with “cram downs” might alter the old predatory lender thinking.

If homeowners feel the urge the predatory lending theory that borrowers will do anything to keep their homes and cars will no longer apply. People will ask for help one time only, and then they will mail the keys to the lender.

Why would that happen? If the borrower thinks he or she was duped and deceived he or she is already mad. Follow that with lenders who demand that the borrower must miss payments before a work-out is considered, and the borrower may opt for bankruptcy simply to try for a cram down. It is the classic case of selecting the best of the worst options. In the long run there is no loyalty to the lender.