Will a Modified Mortgage Affect My Credit?
When homeowners find themselves struggling to pay their mortgage payments each month, a loan modification may help them regain their financial footing and avoid foreclosure. Some homeowners are reluctant to modify their mortgages, however, as doing so could negatively affect their credit scores, resulting in lowered credit lines, higher interest rates and other negative financial consequences.
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Qualifying
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Many lenders will not consider you for a mortgage modification unless you are at least 30 days, and up to 90 days, late on your payments. If you are current on your payments but struggling to afford your liabilities each month, choosing to fall behind on your payments to qualify for a modified home loan will lower your credit score with each payment you miss.
Reporting
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Once you complete your mortgage loan modification, your credit rating may rise or fall, depending on the way your mortgage lender reports the modification. Unfortunately, many lenders report your original mortgage loan as charged-off or settled, which will negatively affect your credit score. On the other hand, if your lender reports your previous mortgage as paid-off, you should not see a significant change in your credit score or report due to your loan modification.
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Late Payments
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When you enter into a loan modification agreement, you must complete a three-month probationary period in which you must make timely payments according to your new mortgage agreement. Some lenders unlawfully report your payments during this probationary period as "rolling 30-day late payments." These repetitive late payments will damage your credit score significantly. However, you may contact your lender to request a correction or contact the U.S. Department of Housing and Urban Development to file a complaint.
Other Credit Influences
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Consider that the financial problems that cause you to need a mortgage modification may also negatively affect your credit score. For example, if you are behind on payments or have a high revolving credit balance, your credit score will take a hit. Though FICO doesn't report its credit scoring model, the company does explain that payment history and the amount of credit used together make up 65 percent of your credit score.
Timeline
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Even if your credit score falls because of a loan modification or other financial problems, the negative information reported to the credit bureaus will only stay on your credit report for seven years. Furthermore, negative items do not carry the same weight on your credit over time, becoming less and less influential on your credit score month to month. Additionally, you can rebuild your credit rating fairly quickly by making your payments on time every month as well as by paying down your debts.
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References
- Bankrate; "Mortgage Modification may be Credit Downer"; Steve Bucci; October 26, 2009
- Experian: Effect of Mortgage Loan Modification on Credit Scores
- Fannie Mae: Making Home Affordable
- Home Affordable Modification Program: Supplemental Directive 09-01
- myFICO.com: What's in Your Credit Score?
- U.S. Department of Housing and Urban Development: Complaints
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