Will a Loan Modification Hurt My Credit Score?

If you fall behind on your mortgage, you have options, but you must be proactive. One of the best ways to get back on track with your mortgage is loan modification. But will a loan modification hurt your credit score?

Will a Loan Modification Hurt My Credit Score?

Loan modification can hurt your credit score

The biggest negative effect to your credit from a modification depends upon whether your lender originates a new loan. If your loan modification results in a new loan and part of the original loan principal was forgiven, your mortgage lender may report the old loan as charged off. This can have a very negative effect on your credit score.

Most loans, however, do not result in a new loan and simply modify the terms of the original loan. For those loans, only the missed mortgage payments prior to modification will negatively affect your credit. Be sure to ask your lender prior to accepting a modification exactly how the modification will be reported to the credit bureaus.

Modification hurts your credit much less than missed payments

Month after month of missed mortgage payments will badly damage your credit. The negative credit impact of a mortgage modification pales in comparison to the impact of missed monthly payments reported by your lender. Missed payments not only indicate that the borrower may no longer be able to afford the property. Missed payments are also accumulative, meaning the past due balance grows monthly, not to mention fees and interest. Missed mortgage payments will damage your credit much more than loan modification.

Modification is almost always preferable to foreclosure

Foreclosure will very negatively impact your credit score. Foreclosure also stays on your credit report for seven years. Over time, the effects of a foreclosure will fade, but the foreclosure itself is considered a very negative credit event. Only under specific circumstances should you simply allow a property to go to foreclosure auction. Instead, contact an experienced foreclosure defense attorney to discuss your options.

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