Does A Loan Modification Affect Your Credit Score?

how does loan modification affect credit score

If you are one of thousands of homeowners considering a loan modification but are concerned about ruining your credit, there are other issues that may have already impacted your credit rating.  Any credit changes from a loan modification would be very minor in comparison.

So Does Loan Modification Affect Your Credit Score?

In the long term…no.  But to understand why your credit score is less likely to be significantly damaged you need to understand how lenders report loan modifications. Plus, understanding how other actions taken to solve financial crisis are a lot more devastating to your credit than any small changes from a modification.

Your Credit Score Before You Apply For Loan Modification

When you make the decision to get a loan modification, it is because you have either missed at least one mortgage payment or you are certain you will in the near future. Or you’re making payments but not doing so on time.

Now to put this is perspective in regards to your credit rating, once you miss that one payment your credit score takes a hit .  Remember, you haven’t even applied for a loan modification yet.

In fact, missing your mortgage payments or filing bankruptcy instead of getting a loan modification will hurt your credit score tremendously.

Your Credit Score After A Loan Modification

The affect on your credit will be depended on how your lender reports your loan modification to the credit bureaus.  So if there is an affect on your credit score it will be a lot less and for a much shorter period of time. By contrast, a foreclosure on your report will put your credit rating in the red for years.

With a loan modification, if your lender  reports it as a “settlement” or an “adjustment” to your original loan, your credit score may be lowered.  Still, it will be nothing compared to missed payments, foreclosure and

bankruptcy.  But there are ways around getting even a minor impact on your credit score after your loan modification.

How To Make Sure Your Loan Modification Does Not Affect Your Credit Score

The bottom line is, depending on how your lender reports your loan modification your credit rating can remain untouched .  So when you are negotiating the new terms of your loan, simply ask your lender how your loan modification will be reported.

The goal is to get your lender to agree to not report your loan modification as a “loan adjustment.”  This way, your credit report will show your modification as a loan but with a lower monthly payment.  To the credit bureau, it means you have not taken on additional debt and instead you  have lowered your monthly payments.

That’s positive for your credit rating.  No harm done to your credit score.  Over time, if you do not miss any payments after your loan modification your credit score will improve even more.

Another important note, make sure during the “trial modification” period that your lender reports your new modified payments as “current.”   The reason is to protect the homeowners credit rating during the trial modification period.

So does loan modification affect your credit score?   Long term…no. If reported properly it can actually help improve your credit .

You’ve got to keep your priorities straight.  Yes having a good credit rating is important, but if you’ve already missed even just one payment your credit score has already taken a major dip.

Focus on the bigger picture…saving your home and getting your finances in order. You’ll have plenty of time to rebuild your credit rating later.

If you have missed payments and your credit score has been compromised, don’t worry.  Once you get a loan modification and continue to make your payments on time, you score will start to improve each month.


Category: Credit

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