A mortgage modification is meant to make a loan payment more affordable for a homeowner at risk of foreclosure or with a loan with high payments and interest. The homeowner and lender come to an agreement to alter the terms of the original mortgage, lowering the monthly payment. The modification may change the repayment length, lower the principal amount and alter the interest rate or type. For example, a borrower with an adjustable-rate loan may get a fixed rate.
In theory, a loan modification shouldn`t hurt the borrower`s credit score, although their score may have already dropped if they were late in their payments by the time they applied for modification. However, some issues in the current mortgage modification system can damage a borrower`s score even further.
If the lender`s mortgage modification and foreclosure departments are not working together, the borrower`s score can take a hit. Some lender modification departments instruct borrowers to stop paying prior to applying for a loan alteration in order to prove hardship, one of the qualifications in certain modification packages.
Once the borrower misses payments, however, the foreclosure department in the bank reports it on the borrower`s credit reports. Each time the borrower fails to make a payment, their credit score takes another hit and this will continue until the modification is in place. Payment history accounts for about 35 percent of a borrower`s credit score, according to Bankrate`s official website.
The Modification Itself
Just the act of a mortgage modification may hurt a borrower`s score. Since the borrower is having the original loan terms altered, they are no longer paying as agreed, even though the lender agreed to modify the loan. Their score may continue to take damage until the mortgage is paid off in full.
While the borrower usually can`t have negative items removed, they can ask the lender to report their timely modification payments. Payments made on time help a credit score, but the borrower may have to contact the lender to ensure their payments are being reported properly.
Despite its drawbacks, a mortgage modification is still less damaging to the borrower`s credit than a short sale or foreclosure would be and they get to stay in their home. Modification programs usually have strict repayment rules, however, so the borrower can`t miss payments or they risk losing the modified terms.
A borrower stands a better chance of getting approval if they start the modification process before they`re too far behind on the loan. If the loan has already entered foreclosure, for example, the lender may be less willing to work out a deal because money has already been spent on legal fees.
If a borrower can`t afford or qualify for a modification, they may need to consider avenues such as a short sale or bankruptcy. Before filing for bankruptcy, borrowers should get professional advice, as bankruptcy impacts all areas of personal finance. Bankruptcy information websites, including
bankruptcyadvice.co.uk, offer some advice to inform a borrower before they meet an attorney.