Will A Loan Modification Hurt Your Credit Score?

Homeowners have been concerned about how loan modifications will be reported on their credit history

. According to the mortgage servicer portal administered by Fannie Mae, if you're current on your mortgage payment when you enter a loan modification, you should be reported as current through the trial loan modification period, even if you're paying less than you were previously. If you are delinquent on your mortgage when you enter the trial period, the loan servicer may continue to report you as delinquent on your payment and workout status.

According to the Consumer Data Industry Association, lenders can report payments on a loan modification using an existing "Special Comment Code AC (paying under a partial agreement) and during a trial loan modification, the code is included on the borrower's credit report." This code can be used after the trial loan modification is made permanent.

As of November 1, 2009, mortgage lenders will be able to use a new Special Comment Code CN (loan modified under a federal government plan). This new code is "not intended to be negative or impact current credit scores," wrote Demitra Wilson, an Equifax spokesperson, in response to an e-mail query. She explained that most likely, "modeling companies will wait until sufficient history has been collected to determine how this new code should be treated.

"Generally speaking, the impact on a borrower's credit score depends on the specific credit score used (i.e. FICO, Vantage Score, PLUS Score, etc.)," Wilson added in her e-mail. "In addition, a number of other factors such as a consumer's overall credit history and their credit mix can also affect the impact of a loan modification on a consumer's credit score."

What does this mean for you? The mixed messages suggest that the mortgage industry itself isn't all that clear on what a loan modification means in terms of risk. You'd think that lowering someone's mortgage payment and making it more affordable would be a good thing -- that the borrower would be less likely to default.

But so far, according to a government report, over 65 percent of those receiving loan modifications go into default again. The bottom line is that if you're having trouble making your mortgage payment, and your lender agrees to give you a loan modification that lowers your monthly payment, hopefully it will be easier for you to make those payments on time.

And paying your bills on time and in full is the cornerstone of a solid credit history and a good credit score.

by: Ron Borg

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