Mortgage Modification Effect on Credit

If I got a mortgage modification, will it effect my credit?

2 Answers

What a GREAT question !  Until last year, I would have said no. Today, I would be absolutely wrong. I've seen the modification documents from a couple of major servicers. In these documents, it gives the servicer the right to report the mortgage as being modified from it's original terms. This is an adverse statement for credit scoring.

Be really careful here. One such servicer has a trial period of 3 reduced payments while the modification is being reviewed. During that period, the agreed payment is not being posted to the account. You therefore end up in default on the loan(even if you paid on time). At the end of the trial period, if you are approved, the negative is added to the principal balance. If you are not approved, the lender has the right to accelerate the loan.

These modifications should not be taken lightly. Do not think of a modification as a refinance. A modification should only be considered after a regular refinance has been ruled out. If you are in a distress situation because of job loss, medical issues, or other occurances, call your servicer immediately. There are options available to you, but do not use a modification unless it is truly necessary.

I think this question really comes from: is a loan modification like a refinance? Or is a loan modification like not paying as agreed even if they allowed you to obtain a modification of the terms?

The answer to this is really a simple one.

When you signed your mortgage paperwork you had terms that you agreed to. During the time that you paid within those terms, when you paid you mortgage you were reported to your credit as paying as agreed. The reason for this is that you were following the terms of the agreement you signed with the mortgage company.

When you do a refinance you are actually closing out that old loan and paying them off in full, thus you paid as agreed. Then you had a NEW loan in place of the OLD loan. Then you payed as you agreed on the NEW loan and were reported as doing just that.

With a Modification, there is NO NEW loan, there is a *RESTRUCTURING of the *EXISTING terms you agreed to.

Therefore when you obtain a modification vs. a refinance the refinance does not damage your credit where as the loan modification most certainly *will and does damage your credit.