Do Home Modifications Hurt Your Credit?
The words "home loan modification" have become part of the American vernacular since the mortgage meltdown starting in 2008. Millions of homeowners have applied for help through lenders in an effort to get mortgage payments reduced either permanently or temporarily. If you are a homeowner concerned about whether a loan modification will hurt your credit, you're not alone. Every homeowner is different and credit damage depends on how current you are with your mortgage payments.
Other People Are Reading
-
Homeowners Who Are Not Behind In Payments
-
If you are current in your home mortgage payments, your lender might question why you need help and might not consider you a viable candidate for the program. If you prove that you are in danger of default and that you have suffered a financial hardship – such as a reduction of income or an increase in expenses – and need assistance, the lender will place you in the loan modification program. You will be given a trial period during which you may not pay your usual mortgage payments; they are typically reduced to test your commitment to the program. If you are current, you may miss as many as three or more of your regular payments and, technically, will not adhere to the terms of your original note. A negative mark on your credit will be triggered by the payments reported late. Even one late payment can be damaging to your credit score.
Homeowners Who Are In Default
-
Homeowners who have missed mortgage payments have already received dings on their credit report for late payments reported by the lender. But for some, the greater danger is foreclosure. At this stage, the home loan modification process will help your credit score if the loan is re-worked successfully and you are able to make your loan payments. Your debt will be brought current, but it will take time to get your credit score back to where it was pre-default. The government has guidelines that stipulate all trial modifications should be noted as "current, but modified." This may have some effect on your credit but will typically not be as harsh or stay on your report as long as a payment default.
-
Debt Forgiven
-
If your lender reduces the principle of your loan to bring it in line with the desirable 31 percent income-to-debt ratio, part of your loan may be considered forgiven. Loan forgiveness is part of the Hope for Homeowners program, a program geared to prevent foreclosures across America. Lenders who participate agree to reduce the principle owed to 90 percent of the home's value. In some instances the bank will still report the loan as "not paid as agreed," which could have a negative impact on your credit score. Some lenders do not report a change to the credit bureaus, which means no mark against you if you are current on your mortgage.
Foreclosure vs. Loan Modification Credit Damage
-
Any damage that the loan modification process creates on your credit score has a much less negative impact than a foreclosure, according to Peter King of MortgageLoan.com. Homeowners who successfully complete the trial period and continue to make their payments will be helped in the long run – with the added bonus of keeping their home.
-
