Does Loan Modification Reflect Negatively on Credit Scores?
If you have fallen behind on the mortgage payments on your home, or you have experienced a change in income that will affect your ability to make your payments, a mortgage loan modification may be an appropriate choice. You may worry that a mortgage modification will negatively impact your credit score. Although a modification may lower your score in limited cases, the effect is substantially less dramatic than a foreclosure, bankruptcy or short sale.
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Debt Forgiveness with a New Loan
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In some cases, a mortgage modification may involve the lender's forgiveness of a portion of the debt -- usually the delinquent balance. In cases where the mortgage lender achieves a modification by closing the loan and opening a new loan, your score may drop by about 14 points if your credit history was clean before the modification, according to VantageScore. If your mortgage and all of your other debts were delinquent, your score may drop by only about two points.
Debt Forgiveness with an Overwrite
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A mortgage lender may forgive a portion of your debt while overwriting your existing loan instead of issuing a new loan. In this case, a modification may raise your score by about 10 points as long as your credit was clean before the modification, notes VantageScore. This is because your total debt obligations are lower after the modification. However, if your mortgage and other accounts were delinquent before the modification, you will not likely see any change in your credit score.
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Recapitalization
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Some mortgage modifications, called recapitalizations, do not involve forgiveness of a portion of your debt to bring your account current or lower your payments. A recapitalization does not typically lower your credit score, according to VantageScore. This is because a recapitalization modification results in your account being reported as paid on time.
Obtaining a Mortgage Modification
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Although legitimate modification options are available, some companies may lead borrowers into agreements that do not actually result in modifications or foreclosure prevention. If you have decided that a mortgage modification is right for you, contact your lender directly to learn about options that can help bring your account current and keep you from losing your home. You can also find and contact a counselor approved by the United States Department of Housing and Urban Development through the Making Home Affordable website.
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