Too many “uninformed” loan officers have told thousands of homeowners and media that skipping your mortgage payment (from the coronavirus) will not impact your credit. The only basis for this statement comes from a few politicians and some loan officers who have said that since lenders will not report 30-day or more late payments to the credit bureaus, skipping payments will not lower your scores. They have little understanding about FICO® Scores and no authority to speak for lenders.
In his report, KUTV’s Michael Locklear (CBS - Salt Lake City, Utah) identifies the potential dangers from skipping your mortgage payments.
Derogatory Account
There is a credit term to recognize, “The loan has not been paid according to the original terms of the loan agreement or ‘Note’.” This is the definition of a derogatory account. Any derogatory account in your credit report will lower your FICO scores for seven years.
One may think a derogatory account refers only to late payments. It does not. It refers to any loan repayment that is less than the full balance. It can also refer to any modification or adjustment to a loan agreement initiated by the borrower which results in reduced or skipped payments for any period-of-time.
Make payments on time and then pay the remaining balance less than the full balance. That is defined as a derogatory account. Modify a loan agreement to move a payment to the end of the loan. That is defined as a derogatory account. Any change to the original loan agreement can trigger the mortgage as a derogatory account. There is no clear written guideline.It is really up to the lenders to decide if an account is classified a derogatory account -- and then the lenders report that to the three major credit bureaus.
There is one exception – student loans. Student loans have options to defer or skip loan payments without impacting your FICO scores. Mortgages have no such loan-payment deferment or arrangement in the “Mortgage Note”.
Skipping a Mortgage Payment
For this reason, skipping a mortgage payment gives the lender the option to classify the loan as, “…not being paid according to the original terms of the loan agreement.” The mortgage lender does not need to report any late payments. It simply reports to the credit bureaus that the loan has not been repaid according to the original terms of the loan agreement.
There is a term your lender sends to the credit bureaus every month with your account information. It states
“Yes”or “No”
if your account is a derogatory account. This definition is separate from your account payment history when your account information is sent to the credit bureaus. “No” and your should be fine. “Yes” and the drop to your FICO scores is immediate.
Can You Find Out from Your Lender?
Unfortunately, if you contact a mortgage lender call center and talk to a customer service representative, most customer service agents are not aware of this detailed issue. Most of them. They will tell you that they will not report a late payment – thinking that is the only issue that can negatively lower your FICO scores.
It is not the late payment that is the issue. It is the change in terms which triggers the account to be a derogatory account which can drop your FICO scores 40, 50 and even more points.
KUTV reporter Michael Locklear offers more insight in his report.
https://kutv.com/news/local/hidden-consequences-of-deferring-your-mortgage-payment
If you can make your mortgage payment, you will most likely be better off. Skip your mortgage payment even one month and you could face a downgrade to your FICO scores for many years.
Following this BAD INFORMATION has the potential to cost thousands of consumers a lot of money.