Does A Loan Modification Affect Your Credit Score?

January 20, 2011 | Comments | Credit

Credit ReportThere is a lot of conflicting information around the web of whether a loan modification will affect your credit score.

The short answer is it depends, based on my research.  Your credit score could go down, stay the same, or even increase in some instances.  Unfortunately, credit reporting agencies use proprietary information to calculate your credit score.

If you are already delinquent on your loan, then it is likely your credit score has fallen and may fall even more before receiving a modification.  Many homeowners were advised that they needed to miss payments in order to be considered for loan modifications, and were more or less forced to hurt their credit in order to stay in their home.

In reference to the modification itself, let’s start with a modification under the Making Home Affordable Program (“HAMP”).  I called the hotline for HAMP, and all they could say is that loan modifications may affect your credit score.  On the actual HAMP website, it states:

34. How will the HAMP modification affect my credit?
Accepting a loan modification can affect your credit score, but the actual effect will depend on a variety of factors. For more information about your credit score and how to improve it, visit www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.shtm.

Each month, servicers must describe to the credit reporting agencies the exact status of each mortgage. If you are current with your mortgage payments prior to the trial period and you make each trial period payment on time, your servicer must report you as current and also identify the loan as “modified under federal government plan.”

If you are delinquent (at least 30 days past the due date) prior to the trial period and the reduced payments do not bring the account current, your servicer must report the level of delinquency and also identify the loan as “modified under federal government plan.”

It appears under HAMP modifications that if you are current with your loan prior to the trial period and then make each trial payment, the servicer is supposed to report you as current and identify the loan as “modified under federal government plan.” I have read stories online of homeowners who claim they have made all of the trial payments under a HAMP loan modification, but have still been reported as late to the credit bureaus during this trial period.

However, it is not clear if these homeowners were originally current before starting their trial period.  It is also not clear if this damage to their credit took place prior to November 2009, when a new code was created for lenders to give to credit agencies reflecting that the borrower was making HAMP modification payments as opposed to the prior practice of reporting that they were making partial payments.  This new code was created in order to protect damage to a borrower’s credit.  The Federal Reserve Bank of Boston wrote an informative article about the changes to the HAMP program in reference to credit scores.

As far as non-HAMP loan modifications, the above guidelines do not apply and therefore, the effect on your credit score will depend on how your lender or loan servicer reports the loan modification to the credit agencies.

In all loan modifications whether HAMP or non-HAMP, it is a safe bet to check with your lender or loan servicer as to how they report the loan modification to the credit agencies.  As of right now, the new code for HAMP loan modifications does not appear to negatively affect your credit score, although this may eventually change.

Interestingly, VantageScore Solutions, which is a company created by the three credit bureaus, performed a study of more than 400,000 mortgage modification customers and determined that loan modifications have had little impact on credit scores.  While it is possibly true that there are a large number of borrowers who were not hurt negatively by loan modifications, it is hard to ignore the actual stories of real people who claim otherwise.

Comments

There are 2 comments for this post.

  1. jrock on September 23, 2011 2:48 pm

    Wow. I just got off the phone with my lender. I was told that:
    1. modifications will affect your score
    2. my modification has been reported as current
    However,
    Due to nature of the automated services used at this and probably many companies. It will show your account as late or past due. It is your responsiblity as an applicant to call every month when you make a payment to request them to update your account status to current and report to the bureau as current.
    Hope this helps anyone else.

  2. Betty Ramsey on February 7, 2012 2:04 pm

    who do contact at the Bank to find out how they report your Loan Modification to the Credit Bureaus – we’re applying for a non-hamp modification, however we have NO late payments and presently have credit scores above 750

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