Thursday, May 23, 2013

Does Loan Modification Hurt Your Credit Scores?

When you can't afford to make your house payments,  loan modification could be the answer to your mortgage woes. In a nutshell, loan modification lowers your monthly payments by reducing your interest rate, reducing the principal of your loan or extending your mortgage's repayment terms. When the government first began pushing loan modifications midway through the recession, banks weren't exactly on board. Granted, they went through the motions because they had to, but people who met the qualifications for a loan modification often ended up losing their homes to foreclosure due to their bank's incompetence (or carefully orchestrated sabotage, as some believe). Luckily, banks don't fight loan modifications like they once did. That doesn't mean, however, that the process isn't still fraught with problems. In some situations, a loan modification may help you keep your house but hurt your credit scores in the process.

Loan Modification and Missed Mortgage Payments

If you think the government's loan modification program the Home Affordable Modification Program or "HAMP" is the only loan modification available, you'd be wrong. Some banks have their own modification programs they use to help keep homeowners in their homes. HAMP doesn't require you to miss any mortgage payments before your trial modification begins, but if your bank uses a private modification program, it can require that you fall behind on your payments before changing the terms of your loan.

Fill out modification app as soon as issues arise.

Missing payments – especially mortgage payments – is disastrous for your credit scores. If your lender requires you to be, say, 90 days' late before you can qualify for a loan modification, you can expect your credit scores to take a nosedive. Your payment history accounts for 35% of your credit score, and missing a single payment could shave over 100 points from your score. Everyone is different and the exact formula is a secret so there is no way to know how much of a hit your credit will take. This much we do know: when you stop making payments to your mortgage lender – regardless of the reason – your credit will sustain serious damage.

Trial Loan Modification Coding Problems

Before you are eligible for a permanent loan modification  you must prove to your lender that you can comfortably afford the new payment. Thus, most programs require that you make timely payments on a temporary modification before your new payment becomes permanent.

Banks report the payments you make to the credit bureaus using a code. Until recently, there was no code for trial loan modification payments. As a result, banks reporting trial modifications as partial mortgage payments. Not paying the full amount you owe makes you appear irresponsible with money and will result in credit damage. Although a trial loan modification code now exists, there is no guarantee that your lender will use it. Thus, its imperative that you keep an eye on your credit during a trial modification allowing you to catch any coding problems early on and fix them.

Loan Modification Impact and Credit Report Removal

If you haven't missed any payments and your bank codes your payments properly when reporting them to the credit bureaus, your credit report may not be affected by the loan modification.  If your credit score is adversely affected, however, take comfort in the fact that the damage isn't permanent.  After 7 years, any credit damage you sustained in the attempt to save your home will be removed. As long as you continue to pay all of your creditors on time during this period, you can expect your credit score to increase significantly after the credit bureaus remove the loan modification from your credit report.

Related Articles:

How a Trial Loan Modification Affects Credit Scores

What is a Key Derogatory on Your Credit Report?

How Much Does One Collection Hurt Your Credit Score?

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