How loan modification affects your credit score
People who have taken a mortgage loan are often scared of losing their home through forced foreclosure. Such people opt for home loan modification in order to save their homes and get their mortgage loans paid monthly in an affordable manner. In such a situation a question that comes to your mind is, “Will loan modification affect my credit score?” There are people whose financial condition will be relieved if they go for a modification in their mortgage, but they hesitate to pursue it due to the fear of hurting their credit score. Here are some legitimate reasons to be concerned.
Impact in the long run may be positive
There is no concrete answer to the question whether or not loan modification hurts ones credit score. A forced foreclosure will have the worst effect on your credit score than a loan modification. So even if mortgage modification drops your credit rating, the impact will be less negative than a foreclosure. This way loan modification may actually help in the long run.
One more question is taken into consideration. “Were you behind on payments prior to loan modification?” If your answer is yes then perhaps the credit reporting bureaus have already received a notice on your late payment. Therefore, your credit score will be reduced.
If, however, you are not late on your mortgage payments, and still you are applying for a loan modification, your credit score may not be affected because there are no late payments to be reported to the credit reporting agencies.
Credit score may affect if reported as settlement
The lenders may often report the loan modification as settlement or adjustment of the term of the loan. This shows that you are unable to fulfill the terms of the original loan and this may negatively affect the credit score. But the effect will surely be less than a string of missed payments that leads to foreclosure.
You may also find that your lenders are reporting this rewritten loan as opening a new line of credit. This affects your credit score negatively because it shows that you are opening a new line of credit without closing the account of the original mortgage.
On the other hand, lenders may not report this as a settlement. Instead they will report is simply as a rewritten agreement. In this case your credit rating may improve because your monthly payments will decrease.
While negotiating a loan modification, always ask your lender how they report it. Be careful with your decision so that it doesn’t hurt your credit score adversely.
