The 411 on Mortgage Modification and Your Credit Score

OCT 21, 2011

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Defaulting on a mortgage is one of the worst things that can happen to your credit. If youre struggling to make your monthly mortgage payment and protect your credit score at the same time, youre probably willing to consider just about anything that might help.

If youre thinking that changing the terms of your home loan might be the answer, there are a few things you should know about mortgage modification and your credit score.

The first thing you need to learn is if you will qualify for mortgage modification. The process can take a while. The Home Affordable Modification Program  (HAMP) is effective for mortgages initiated before Jan. 1, 2009 and will expire on Dec. 31, 2012. Under this program there are certain qualifications youll have to meet to apply, and you can learn about them on the Freddie Mac website. Youll need to be patient, persistent and thorough in your pursuit of a mortgage modification

While modifying your mortgage can help prevent the financial disaster of foreclosure, it will likely impact your credit score. Failing to pay in full the amount of any debt, including your home loan, can harm your credit score. While a mortgage modification is a sign youre doing your best to pay something toward your debt, it still wont be the full amount you originally agreed to pay, and thats how creditors will likely view it.

The real advantage of a mortgage modification is that it can allow you to stay in your home and avoid foreclosure. If youre lucky enough to qualify for one, a mortgage modification can be less damaging to your credit than foreclosure. And being able to stay in your home, without the trauma and expense of foreclosure and relocation, can help put you in a better position to work toward improving the damage mortgage modification can cause to your credit score.

Once youve secured the financial relief of a mortgage modification, take steps to boost your credit score, including making your new mortgage payment on time every month.