Will a loan modification impact your credit score?
How will a loan modification impact your credit report?
I had a client ask me last week about how a loan modification will impact his credit score. A loan modification is a renegotiation of the original terms of a loan, normally a mortgage. Loan modifications can be a reduction in payment amount, a reduction in interest rate or a reduction in the principal balance or a reduction in all three.
The borrower needs to have some sort of compelling reason why they are in financial hardship when they ask for the modification. To qualify for a loan modification borrowers have to go back to the original creditor, and explain their situation. Usually there’s been some derogatory activity on that account which will also help make the case, but that derogatory activity (late payments) will hurt their credit score.
If borrowers can keep making those payments on time they should do so. When you think about a credit report and you look at the mortgage account, the fact that the account says “loan modified” or “loan modification” that in and of itself, is not really going to hurt you from a credit score perspective. The reduction in terms, let’s say your payment is 488 dollars rather than 500 and the term is still thirty years, that’s not really going to help borrowers from a credit score perspective either. If the borrower can pay down the balance on the mortgage, that will help them slightly, but not as much as if they pay down the balance on an over extended credit card.
If they get some help with their mortgage balance that could help their credit score. Provided that there’s no other derogatory activity associated with that account. Strictly from a credit score standpoint (much like a short sale), a loan modification does not have a clear classification in the credit repository binary code. If you qualify for a loan modification, you should definitely go ahead and get it, check your State Housing Authority they may have some programs for you, especially if you’ve lost your job recently.
If you’re looking for other ways to improve your credit score please go to GetLoanReady.com you can get free videos and worksheets to increase your credit score from a more holistic perspective. Never Pay Collections
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