How Do Loan Modifications Affect Your Credit?

Theres a lot of information floating around out there about how loan modifications affect your credit score

. Some people say yes it does, and some say not at all. The answer really lies in how the lender decides to report it and also in what type of modification a borrower is getting.

To put it in the simplest of words, getting a loan modification means that the lender is not getting as profitable of terms as the original agreement. The lender almost always loses because they are reducing principal balances or interest rates. Because of this fact alone, the lender will usually report something negative to your credit report. So, most of the time, obtaining some sort of loan modification should affect a borrowers scores because they are not meeting their original obligation.

There currently is no code, or specific way, for a lender to report a loan modification to the credit bureaus. Ive seen it report in the form of late payments, charge-offs, settled debts, or just as comments in the comment section. If a lender reduces the principal amount of the loan, they sometimes report it as paid for less than the balance owed, which is not good. If the principal balance isnt being reduced, and just the payment / rate is changing, this could have no effect on your credit since payments and rates are not part of the credit scoring model.

Some lenders wont even consider a loan modification unless a consumer is 90 days late and getting to that point definitely hurts your credit.

Ive heard of larger lenders like Chase and Citi give their 3 month trial period, telling consumers that theyll stop reporting to the credit bureaus during that period, and then afterwards reported that whole time as late payments.so you have to be careful.

Once many loan modifications are complete, the lenders will report the loan as current pays as agreed. However, that will not remove any derogatory history that occurred before that. If a borrower had late payments, etc., that will still report negatively on the credit report. Also, the amount delinquent plays a role in the credit score too. If someone went 90 days late before the modification, his or her credit will be hurt far more than a borrower who only went 30 days late.

My advice: Negotiate with your loan holder exactly how the modification will be reported to the credit bureaus. Sometimes theyll agree to keep it clean and then it wont affect your credit score one bit.

by: Greg, the Credit Repair Guy

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