Effect of mortgage loan modification on credit scores

Dear Experian,

I’m asking my bank to do a loan modification on my mortgage. They said that I need to be 30 days late on my payment in order to do the modification. Is this going to damage my credit?



Dear RBL,

Any time you allow an account to become delinquent it will have a negative impact on your credit history.

Mortgage modifications are intended for people struggling with serious debt problems. The modification means the mortgage lender is accepting less profitable terms. The lenders can’t make special terms for every mortgage they hold so they only want to make the change if it is better than the alternative of having you file for bankruptcy or going into foreclosure.

In fact, many of the mortgage loan guarantee programs will only accept modified loans if the they are 90 days past due or if the loan is in imminent danger of default, such as the borrower has become unemployed.

While this is a legitimate policy for many mortgage lenders, I do caution consumers to be wary of some organizations claiming to be able to lower credit card payments. They, too, often advise you to stop paying. The theory is that once you are late, you will have more leverage to negotiate with your lender to settle the balance or get reduced finance charges. They also often charge a fee for their services.

The problem with that strategy is that it destroys your credit history. Intentionally becoming delinquent might result in lowering your payments, but at the cost of making it difficult for you to get the best interest rates or perhaps even get approved for a future mortgage or other types of credit.

I recognize that many of you are facing very difficult situations with your mortgages and have no choice but to get a loan modification. I’m sure that you have stopped any optional spending, so keep in mind that as you pay off auto loans and credit cards and their finance charges, it eventually will make it much easier to make that mortgage payment.

The Federal Deposit Insurance Corporation (FDIC) has produced a helpful brochure about loan modification, and the Homeownership Preservation Foundation also can provide valuable information about how to get help.

I wish you all the best in managing your financial challenges during this difficult time.

Thanks for asking.

- The “Ask Experian” team

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