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Ask Creditnet: Will a Loan Modification Hurt My Credit Scores?

Dear Creditnet: I'm thinking about applying for a loan modification so I can hopefully continue to afford the mortgage payments on my home, but I've heard it will really hurt my credit scores. Is that true? If so, what kind of hit can I expect my scores to take? -Wendy in CA

Answer: If you're not late on your mortgage yet, I would recommend looking into refinancing options first. Interest rates are not only at historic lows, but the effect of a refinance on your current FICO scores should be minimal. Loan modifications, on the other hand, will likely have a much greater negative effect on your credit scores. The damage won't be quite as bad as it used to be several years ago when lenders were reporting all loan modifications as "partial payment plans", which the FICO credit-scoring model viewed as a derogatory mark. Fortunately, lenders can now report them as a "modifications under government sponsored program", which are considered neutral in the eyes of FICO and shouldn't impact your scores. However, the real problem lies in the fact that loan modifications often require you to make trial payments at the lower monthly amount while your application is being processed. During this time lenders will report you to the credit bureaus as late since you're technically not making the required monthly payment per your original contract. This could go on for 6-9 months in some cases. So, even if your loan modification is approved, you'll still end up with late payments and an overdue balance on your mortgage. And those negative marks will definitely do some damage to your credit scores! Exactly how much damage is hard to say since there are so many other factors at play in your FICO credit scores. But what I can tell you is that one 30-day late payment could cost your scores more than 100 points, so it's something you shouldn't take lightly. Photo by Nikcname

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Joshua Heckathorn's picture

Joshua Heckathorn is a credit expert and has been featured on CNNMoney, FOX Business, Yahoo Finance, The Street, and many other national publications during the past twenty years.  He received a Bachelor of Science in Management (Finance) from Brigham Young University's Marriott School of Business and earned his MBA from Seattle University.

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Tim Richmond's picture

Refinancing is a much better solution than loan modification if you're worried about your credit score. In your experience, is there a certain percentage of institutions that do not report you as late when you're making trial payments?