Will A Loan Modification Hurt Your Credit Score?

One of the most common questions homeowners want answered is how does a loan modification affect your FICO or credit score. There are a few pieces to this question and we will try to break it down in this post. While we will try to cover it here, wondering whether or not getting a modification hurts your credit is viewed as a silly question by many. Now we realize it’s important to protect your credit but at the same time, if you cannot pay your bills or you are struggling to put food on the table, you need to prioritize and realize that a loan modification could be your best option.

First, if you are already late on your mortgage, do not spend your time worrying about how a loan modification affects your credit score. This is because a late mortgage payment has already negatively affected your credit score so a loan modification will not be the reason your credit score has gone down. We can also point out the obvious reason not to worry about the credit impact of a loan modification. If you have missed one mortgage payment or more, you need to spend your time focusing on getting the help you need so you will not miss payments in the future. A loan modification that reduces your monthly mortgage payment will help you get your credit back on track because it will allow you to use the money you save by being able to pay your mortgage and your other bills on time going forward.

In general, a loan modification will not hurt your credit long term. That being said, when it comes to loan modifications and credit, every lender handles how they report to the credit bureaus a little differently. However, if you are approved for a loan modification and you meet the terms of that modification, it will not affect your credit. A lot of homeowners are getting approved under the Making Home Affordable Plan (aka HAMP or Obama Plan) and this plan requires three trial payments before your loan is reviewed for a permanent modification. During the trial period, the banks may report your mortgage to the credit bureaus by indicating you are under a modification plan, making payments under the government’s modification plan or as ‘paying less than agreed.’ Some banks or mortgage lenders will not report your mortgage payment status at all during the modification trial period and once the modification is made permanent, they will begin reporting your mortgage again like they did prior to the modification being approved.

Specifically, your bank or mortgage lender might indicate that a loan modification can negatively affect your credit and they will report you delinquent during the trial period. What they don’t tell you is that if you meet the terms of your loan modification and make the trial payments as agreed, they will correct your credit to show you paid as agreed and remove any negative reports on your credit report. In other words, there might be a short term negative impact to your credit but as long as you meet the terms of your modification plan then long term (6 months or more) there should not be a negative impact.

You have to understand that even when you are approved for a loan modification, especially when you are not behind on your mortgage, your bank or mortgage lender would much prefer you make the normal payment. By telling you that you will be hurting your credit, this keeps you from accepting the modification because credit is so vital these days and the last thing you want to do is hurt it. It is also a way for your bank or mortgage lender to determine if you really need help. Most people who warrant a modification are not as concerned with their credit as much as they are about keeping their home.

All that being said, no matter how your bank or mortgage lender reports you during the trial period, once you meet the terms they set for you and your modification is made permanent, they will go back and correct your credit. That is why it will not be an issue long term but short term it is important you know how it is handled since you could call your bank three times to ask them about this and each person will tell you something different as far as how they report the credit. They should all agree that the credit will be updated once the trial period is complete.

Needless to say, if you truly need help, then your credit should be the least of your concerns. If you can make your payment, even if you are struggling to do so, you need to examine your situation to see if you actually need a modification. As it mentions above, if you are late on your mortgage or you will be late without a modification, then do not worry about your credit. In this case, you want to get the modification done as quickly as possible to avoid missing more payments or worse case, losing your home.