Does A Mortgage Loan Modification Affect Your Credit Scores?

Does A Mortgage Loan Modification Affect Your Credit Scores?
You’re already experiencing financial difficulty if you’re considering a mortgage loan modification. The upside to a loan modification is that it can help make your payments more affordable. On the other hand, restructuring your debt this way can have a negative impact on your credit score.

Can A Mortgage Loan Modification Hurt Your Credit?

A loan modification may involve putting your loan in forbearance, extending your loan’s repayment term or reducing your interest rate. It can be costly for lenders to foreclose on your home. Instead, they offer loan modification because it will make your monthly payments more affordable. And having more affordable payments means less chance you won’t stick to your payment terms.

However, depending on how the lender reports the amendment to your agreement, along with other factors, it could negatively impact your credit scores. But despite the potential for credit damage, a loan modification can still be the right choice in the long run.

Ways Loan Modification Can Impact Your Credit

There are several short term and long term ways in which a mortgage load modification can affect your credit score.

  1. When reported as a settlement. Because you’re changing the terms of your loan, some lenders may report your loan modification to the credit bureaus as a settlement. Not only will this wreak havoc on your credit scores, but it will remain on your credit reports for several years.
  2. Missed payments. Generally, loan modification is available to borrowers who are nearing default or already delinquent on payments. If you haven’t reached this point yet, missing just one payment could severely hurt your credit score.
  3. Long-term positive for your score. If you’re able to keep up with payments due to the loan modification, maintaining a positive payment history going forward helps improve your credit score over time.
  4. Prevents foreclosure. There’s always the possibility of your credit score taking a hit. But modifying your loan terms can help you avoid foreclosure. Having your home foreclosed means an even greater negative impact on your credit score.

Unfortunately, there’s no special formula that predicts exactly how a modification might impact you. However, you can ask your lender how it will be reported. Ultimately, whether your credit score will drop and by how much depends on your overall credit profile.

Monitor Your Credit To Avoid Surprises

It’s important for you to understand how your decisions impact your credit score. Doing so can help you determine how to address potential problems and track your progress as you work to increase your credit score over time. The professional accountants and tax advisors at The Ray Group can help you get control of your finances. Call us today at (951) 296-0785 to schedule an appointment or schedule online.

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