April 16, 2009
Thursday

If you've been tempted to skip a few mortgage payments to try to convince your lender to modify your loan, you may want to resist that temptation. Whether your goal is to stave off foreclosure or just make your payments more affordable, experts say deliberate delinquency is not as smart an idea as it may seem.

The bottom line is that:

- If you can make your payment, you should do so.

- If you can't, you shouldn't.

- If you're in between, you should get help to assess your situation.

"Back in the day, (lenders) would only provide modifications to people who were significantly behind because that evidenced that they truly needed the loan modified. They were of that mindset, and they didn't realize the enormity of the problem," says Gail Cunningham, a spokesperson for the National Foundation for Credit Counseling in Silver Spring, Md. "But now, they've realized that the logic of making someone become delinquent and dig a deep financial hole before you help them was really not good for anyone."

That new thinking can be seen on some, though by no means all, of the lenders' Web sites, which have been updated to suggest, however subtly, that a late payment may no longer be a prerequisite to a loan modification.

Christine Holevas, a spokeswoman for JPMorgan Chase in Chicago, declined to comment on whether homeowners should make a late payment to better their odds of a loan modification. But she reiterated the standard advice that you shouldn't wait until you've missed a payment to contact your loan servicer. Instead, you should pick up the phone as soon as you believe you may be in danger of delinquency.

The federal government's new Making Home Affordable plan may be another reason why lenders have tweaked their policies with respect to delinquency and loan modifications. The new plan, which includes a loan modification program and a refinance program, offers lenders new incentives to participate.

The loan modification program is open to borrowers who have missed one or more payments, but a missed payment is not a requirement. In fact, the FAQs for this program state that "responsible borrowers who are struggling to remain current on their mortgage payments are eligible if they are at risk of imminent default." Risk of default might involve a mortgage payment that has reset and is no longer affordable, a significant loss of income or other types of hardships.

The refinance program is open only to homeowners who haven't made a payment more than 30 days late within the last 12 months. The FAQs for this program state that "borrowers who are currently delinquent or have been 30 days overdue more than once during the past 12 months will not qualify." That means if you deliberately missed a mortgage payment, you likely disqualified yourself from this program.

If you're still tempted to skip a payment, you should be aware that, that choice will harm your credit score, according to Craig Watts, a spokesman for FICO in San Rafael, Calif.

Credit scores weigh the recency, severity and frequency of your delinquent accounts, Watts says. That means the more recent a missed payment is, the greater the negative effect on your score will be. Payments made more than 90 days late--or never--will cause the most damage, and a pattern of delinquent accounts will hurt more than an isolated incident.

A lower credit score might seem a small price compared with the prospect of a cheaper mortgage payment. However, that lower score will cause consequences that shouldn't be taken lightly. If your score drops, you'll have more difficulty refinancing your mortgage, getting a car loan, obtaining new credit cards, or opening new accounts at department or retail stores. You also could be required to make cash deposits to obtain utilities, cable television or cellular phone services, Watts says. The favorable terms you've enjoyed on your existing credit accounts could be altered to your detriment as well, Cunningham says.

What's more, if you willfully skip a mortgage payment, you'll still owe that amount, plus additional interest and penalties that can add up fast. If you miss several payments, you might not be able to recover financially even if your lender modified your loan. And if you eventually lose your home due to foreclosure, you might not be able to rent another place to live once your credit score has been damaged.

Mortgage rates slipped slightly this week.

The average 30-year fixed rate fell 2 basis points, to 5.18 percent. A basis point is one-hundredth of a percentage point.

This week's average 15-year fixed rate -- a popular option for refinancing -- edged down 3 basis points, to 4.72 percent.

The average jumbo 30-year fixed dropped 7 basis points, to 6.69 percent.

Adjustable-rate mortgages were split this week. The one-year adjustable-rate mortgage ticked up 2 basis points, to 5.28 percent. The popular 5/1 ARM sank 15 basis points, to 5.12 percent.

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