Le Knapp: How Much Does A Loan Modification Affect Your Credit Score?

If you fall behind on your mortgage, you have options, but you must be proactive. One of the best ways to get back on track with your mortgage is loan modification The biggest negative effect to your credit from a modification depends upon whether your lender originates a new loan. If your loan modification result in a new loan and part of the original loan principal was forgiven, your mortgage lender may report the old loan as charged off. This can have a very negative effect on your credit score. Most loans, however, do not result in a new loan and simply modify the terms of the original loan. For those loans, only the missed mortgage payments prior to modification will negatively affect your credit. Be sure to ask your lender prior to accepting a modification exactly how the modification will be reported to the credit bureaus.

Modification hurts your credit much less than missed payments
Month after month of missed mortgage payments will badly damage your credit. The negative credit impact of a mortgage modification pales in comparison to the impact of missed monthly payments reported by your lender. Missed payments not only indicate that the borrower may no longer be able to afford the property. Missed payments are also accumulative, meaning the past due balance grows monthly, not to mention fees and interest. Missed mortgage payments will damage your credit much more than loan modification.

Modification is almost always preferable to foreclosure

Foreclosure will very negatively impact your credit score. Foreclosure also stays on your credit report for seven years. Over time, the effects of a foreclosure will fade, but the foreclosure itself is considered a very negative credit event. Only under specific circumstances should you simply allow a property to go to foreclosure auction. Instead, contact an experienced foreclosure defense attorney to discuss your options.

The Home Affordable Modification Program

Loan modification through government programs, such as the Home Affordable Modification Program (HAMP), may have no impact at all. Such programs include loan reporting requirements that result in the mortgage continuing to be reported as current and paid in full, if the requirements of the program are met by the homeowner.

Such programs are intended for people struggling with serious debt problems. In order to qualify, you may already have to have serious debt repayment difficulties. If so, you shouldn’t be concerned about your credit scores because they are already probably poor and you aren’t in a financial position to take on new debt.

Loan Modification and Debt Settlement

Other programs may be referred to as “loan modification” but could hurt your credit scores because they are actually debt settlement. Intentionally allowing a mortgage or any debt to become delinquent will result in the account payments being shown as late in your credit history, and your credit scores will suffer. If you negotiate a lower interest rate or reduced repayment, the account might also be reported as settled or “paid for less than originally agreed, which also will hurt your credit scores. Before entering into a “loan modification” be certain to carefully review the contract terms and understand how your payment history will be reported. Anything other than paid on time and in full will have a negative impact. Credit scores are calculated from the information in consumer credit reports. Whether a loan modification affects the borrower’s FICO score depends on whether and how the lender chooses to report the event to the credit bureau, as well as on the person’s overall credit profile. If a lender indicates to a credit bureau that the consumer has not made payments on a mortgage as originally agreed, that information on the consumer’s credit report could cause the consumer’s FICO score to decrease or it could have little to no impact on the score. Back when lenders started to offer loan modifications, lenders said if you made three temporary loan modification payments, the modification would become permanent. However, lenders never clearly disclosed (and often denied) to their borrowers that the loan modification process allowed the bank to report the lower temporary loan payments as a negative piece of information on their credit history. On the other hand, you appear to have received a permanent loan modification. While you might not feel that the 5 percent rate is great, you got something that most other borrowers that applied for a loan modification did not. Most other borrowers that applied and paid temporary lower payments ended up without a permanent loan modification and with a credit history far worse than when they first met with their lenders. You should look at your credit history and see if there is anything else that might be hurting your credit score. Go to http://www.AnnualCreditReport.com and obtain at least one credit history available to you free of charge. The three largest credit reporting bureaus (Experian, Transunion, and Equifax) manage this site and by law, they must each provide you with a free copy of your credit history, once a year.

While your credit history is free, getting a copy of your credit score will cost you around $10 – but we recommend you do it so you can see a rough approximation of what your lender sees. Once you receive your credit history, you can review it for inconsistencies, mistakes and start to understand whether there is anything you can do other than allowing time to pass that will improve it. If you clean up your credit history, your credit score will improve. Once your credit score is over 720, you should be able to refinance your loan with a different lender. The real issue is whether you have any equity in your home. You could have received the loan modification from your lender even if you had little or no equity in your home. That means that your lender modified your loan even if the amount you owed on your home exceeded the value of the home. If you wanted to refinance today and your home’s value was still lower than what you owe the lender, you wouldn’t be able to get a new loan. In fact, the only way you’ll be able to get a new loan is to wait for your home’s value to go way up or sell the home in a short sale and then buy a new home several years down the road.

Refinancing and loan modifications can affect your FICO score in a few areas. How much depends on whether it’s reported to the credit bureaus as the same loan with changes or as an entirely new loan. If it’s reported as the same loan with changes, three pieces of information associated with the loan modification may affect your score: the credit inquiry, changes to the loan balance, and changes to the terms of that loan. Overall, the impact of these changes on your FICO score should be minimal. If it’s reported as a new loan, your score could still be affected by the inquiry, balance, and terms of the loan, along with the additional impact of a new “open date.” A new or recent open date typically indicates that it is a new credit obligation and, as a result, can impact the score more than if the terms of the existing loan are simply changed. If you’re struggling to keep up with your mortgage payments or you’ve already fallen way behind, a mortgage modification can help you save your home and lighten your financial load. Modifications are offered by both government programs and private lenders. These loan alterations are designed to lower your monthly payments. But if you have your eye on your credit score and are wavering about going forward with a modification, there are a few key factors to keep in mind. Depending on you and the program you choose, the modification may affect your credit scores.

Government Modification Programs

If you have a government-backed loan or a government-insured loan through departments you may qualify for the Home Affordable Modification Program (HAMP). HAMP is a government-sponsored program to help homeowners modify their mortgages and make monthly payments more affordable. According to Experian, these programs have requirements that state a mortgage must be reported as paid in full, so just going through HAMP alone won’t have a negative impact on your credit score.

Lender Modification Programs

If you don’t qualify for HAMP or choose to go through your lender for a mortgage modification, the story might be different. Some lenders may report a modification as a debt settlement, which will have an adverse impact on your credit score. If your credit score is on the low side and you’re already behind on mortgage payments, the impact may be minimal. However, if you’ve maintained a high credit score, a ding from a reported debt settlement may have a larger impact on your credit score. To make sure your credit score is protected, ask your lender how they plan to report the modification to credit bureaus before you finalize the deal.

After Modification

Once your modification is in place, you can use it to improve your credit score. Your lender will report your payment history to the credit bureaus, and if you pay on time each month your credit score will gradually increase as you build up a solid payment history. On the flip side, if you fall behind on your payments under modification, the lender will report this as well. Late payments can take a bite out of your credit score especially if they’re a recurring issue. If you can’t keep up with your mortgage payments and don’t use a mortgage modification, your only alternatives may be a short sale or a foreclosure. A foreclosure will have an enormous impact on your credit score and a lasting impact on future homeownership. It may be a year or more before you can qualify for a loan again. A short sale doesn’t affect your credit score as much as a foreclosure, but it will still lower your score and stay on your credit rating for up to seven years.

Mortgage modification agreements revise the terms of home mortgages. They can be used for lowering mortgage rates, extending the repayment term of mortgage loans and adding past due payment amounts to a mortgage loan. A mortgage modification itself does not affect credit, but having past-due payments at the time of a modification can lower homeowners’ credit scores.

Reducing an Interest Rate Using a Modification Agreement

Mortgage companies use modification agreements for lowering mortgage interest rates. This lowers homeowners’ monthly mortgage payments and can help financially challenged homeowners keep their homes. Modifications are also used for lowering interest rates for homes that have lost value and do not qualify for traditional refinancing. Modifying mortgage loans can motivate homeowners to stay in homes an inability to refinance to a lower mortgage rate may otherwise cause them to abandon. A modification may incorporate additional adjustments to the terms of a mortgage loan according to individual homeowner situations. A modification agreement can lower the mortgage rate and extend the repayment term of a mortgage, or it may change the type of loan from an adjustable to fixed rate mortgage.

Extending Repayment Term of a Mortgage Loan

Mortgage lenders may extend the term of a mortgage loan for lowering payments and assisting homeowners with bringing their mortgage payments current. A 30-year mortgage requires 360 monthly payments. A borrower whose income drops after several years of owning her home and making mortgage payments may ask her mortgage company for a modification that includes lowering her mortgage rate and extending the term of her mortgage to the original 360 months. In cases involving adding delinquent mortgage payments to the mortgage balance, the mortgage term is typically extended by the number of monthly payments added to the mortgage balance.

Adding Past Due Payments to a Mortgage Balance

Mortgage modifications revise the terms of home mortgage documents. They can be used for lowering mortgage rates, extending the repayment terms of mortgage loans and adding past due payment amounts to a mortgage loan. When past-due payment amounts are added to the balance of a mortgage loan, the payment due date is also adjusted and shown in the modification agreement. If past due payments for September, October and November payments are added to the mortgage balance, and a loan modification is effective Dec. 1, the payment due date would be adjusted to Dec. 1, and the mortgage term would be extended by at least three months to keep an increased mortgage balance from causing the monthly payment to rise. Modifying a delinquent mortgage to a current status will show the delinquent payments as current, but does not erase initial reporting of the delinquency on credit reports. Mortgage companies approve modifications based on verifying homeowner hardship and homeowner ability to repay the mortgage according to its modified terms. Supplying all information and documentation requested by your mortgage lender speeds up the modification approval process. Check on the status of your modification request weekly. Your mortgage servicing company may have to get approval of your mortgage modification from the owner of your mortgage or a mortgage insurance company.

A load modification is the result of a negotiation between a borrower and lender, typically over a large loan like a mortgage. Modifications help both sides compromise when the borrower cannot make the current monthly payments. This can save the borrower from foreclosure and credit damage, but the modification may also create tax complications.