If you are considering loan modification options, you may be wondering whether a loan modification program will affect your credit score. The answer can vary widely based on a number of factors; in general, loan modification does affect credit score, but how and how much is almost entirely based on the individual’s case.
How Loan Modification Affects Credit Score
When you apply for a loan modification, it is reported to the credit bureaus by your lender as a status change to your payment plan; essentially, it looks to the credit bureaus like you are not able to repay the mortgage as originally agreed upon. This can have a negative impact on credit score. For those with very good credit, the impact seems to generally be higher than for those who are suffering from credit troubles. The reasons are not fully known, but it is suspected that those with better credit take a bigger hit because they have farther to fall.
Those whose mortgages are already in arrears or delinquent have probably seen their credit score dip a bit, so it may make more sense both financially and in terms of credit score to enter into loan modification negotiations with the lender. For those with good credit standing the issue becomes more complicated; but many loan modification programs require a mortgage to be 90 days delinquent before negotiations begin in the first place. In other words, if your credit is good and you are not yet missing payments on your mortgage, it may be best to keep clear of loan modification options for the time being. Even some trial modification programs end up being reported to credit bureaus, so be careful when deciding how to proceed.