Mortgage Modification & Credit Score

Does a Mortgage Modification Affect Your Credit Score?

Mortgage modification has grown significantly more popular in recent months, a result of the housing crash and the spate of mortgage defaults that followed. But while it has helped a good number of homeowners, many are still reluctant to get a mortgage loan modification. One of the main reasons is its potential effect on one’s credit rating over the long term.

Sure, it’s not as damaging as a short sale or a foreclosure, which can stay on your record for up to ten years. But in a credit-conscious society, a drop in your credit score can have major effects in your lifestyle. So how does a mortgage modification really affect your credit score, and what can you do about it?

Circumstances of default
The first thing to keep in mind is that by the time you apply for a loan modification, there may already have been damage to your credit score. Because modifying means accepting less profitable terms, most banks require you to be at least a month behind (sometimes even more) to qualify for a mortgage modification. But each payment you miss ends up on your credit report, and even if a loan mod gets you back on track, it’ll still take a while to clear it up. So your first step should be to call up your lender and know their policies—and decide whether the new terms are worth the added delinquency.

Reporting policies
Another important factor is how your lender views the mortgage loan modification. Some will consider your loan reinstated and carry on as normal, but others can report it to the credit bureaus as a negative mark. So while you do save money upfront, you may have to pay for it with a sharp blow to your credit score. Banks rarely bring up this matter with their borrowers, so it’s your job to inquire - call up the Loss Mitigation department and simply ask how mortgage loan modifications are reported.

Your credit requirements
For some homeowners, a reduced credit score is actually a fair trade-off considering the money they’ll be saving. If you don’t plan on taking out new loans in the next few years, a mortgage modification may be worth the credit score drop. Consider your future credit requirements: will you need a new credit card, a car loan, or a student loan in the years to come? If you think you’ll need that score before you’re fully back on track, try negotiating with your lender or ask about more credit-friendly alternatives.