Loan Modifications and Credit Scores

SEP 03, 2010

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In todays strapped economy, many homeowners are considering a loan modification to lower interest rates and renegotiate better terms for their mortgage.

Before you jump-on to the lower monthly payments train, consider one of the sobering truths about modifying your mortgage: Your credit score will likely drop.

So many families today are facing money problems which have them wondering how they can save their home. For most, homes aren’t just possessions, they’re full of memories, so people will do what they can to keep up with their payments and avoid foreclosure or being forced to sell. If you owe more on your mortgage than your home is actually worth, you may also be able to modify your loan and save yourself some money.

But be advised: When your lender agrees to lower your mortgage payments, he or she might also report your payments to credit bureaus as a “partial payment” or “deferred payment,” even if you pay the amount on time each month.

Anna, a current homeowner, wrote into the Chicago Tribune and told her story, reminding everyone that they should know how these modifications work before agreeing to anything. After being told by her mortgage company that she would have to miss a payment to receive a loan modification, she followed their advice and was approved for a six-month deferment with no payments.

That’s when the real problems began.

“It is now six months later and they have still not finished making a long term decision on my modification. I found out today that through the entire deferment period, they were reporting me delinquent. My credit score dropped 200 points since they have reported me as 6 months behind even though they told me I didn’t have to send any payments,” she wrote.

If you are thinking about a loan modification but are worried about your credit score, keep a few things in mind:

It will all depend on how your lender reports the payments: so ask them. If they say the payment will be reported as “paid as agreed,” your credit score won’t be damaged. But if they plan to report it as “partial,” “deferred” or “not paid as agreed,” you will see your score fall.

Also, a loan modification will still have a less severe negative impact on your credit score than a foreclosure.

The decision to modify your mortgage and save your home is not an easy one. Be upfront with your lender, pick their brain about what will happen at points A, B and C. Dont let what happened to Anna happen to you.