How Will a Mortgage Loan Modification Affect My Credit Scores?

Quick Answer

Mortgage loan modifications often require you to miss at least one payment before the lender will consider changing your loan terms, which can seriously harm your credit. There are other steps you can take to help you make loan payments without damaging your credit score.

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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?

- RBL

Dear RBL,

Any time you allow an account to become delinquent it will have a negative impact on your credit history. Even one late payment can badly damage credit scores, and any missed payment will remain on your credit report for seven years.

What Is a Mortgage Modification?

Mortgage modifications are intended for people struggling with serious debt problems. The lender agrees to a change in the repayment terms of your loan that lowers your monthly payment, whether it be a reduction in your interest rate or an extension of your repayment period. Keep in mind that increasing your loan repayment over a longer period of time will likely increase the total amount of interest you'll pay over the life of the loan.

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 go into foreclosure. Each lender has their own criteria, but they are typically looking to see whether the loan is in imminent danger of default, such as the borrower has become unemployed or is otherwise experiencing significant financial hardship. Some lenders may have a policy where they are only willing to modify a loan if it is already past due.

Loan Modification vs. Debt Settlement Plans

While this is a legitimate policy for many mortgage lenders, consumers should use caution when dealing with 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.

Is Loan Modification the Right Choice?

If you are facing a very difficult situation with your mortgage, you may have no choice but to get a loan modification, but you should consider all alternatives before making the final decision. If you are not yet past due, eliminating any optional spending, refinancing your mortgage or car loan or taking on a part-time job or side gig may be other options that could enable you to continue making payments without harming your credit

Ultimately, you may decide that the loan modification program is necessary for you to remain in your home and continue making payments. If so, any negative impact from the missed payment and subsequent modification will almost certainly be less severe than if you were to foreclose on your home.

How Can I Help My Credit Recover?

Once your modification has been approved and you are in a better position to manage the debt, the most important thing you can do to mitigate any damage to your credit is to ensure all your payments are made on time going forward. Although any past delinquencies still will be part of your credit history, they will begin to have less of an impact as time passes.

Other things you can do to begin improving your scores:

  • Pay down credit card balances. Your credit utilization rate, or balance-to-limit ratio, is a key factor in your credit scores. Utilization rates above 30% will impact scores the most, while keeping your utilization rate below 10% is ideal.
  • Order your free credit score. When you get your free score from Experian, it will have a list of the top risk factors that are currently impacting you the most. If you focus on improving those factors, your credit scores should improve as well.
  • Enroll in Experian Boost®ø. With this free feature, you can get credit for your on-time utility, streaming service and rent payments. When you sign up, you can choose which accounts you would like Experian to add to your record, and you will receive a new free credit score once they have been added so you can see how much your score has increased.

Thanks for asking.

Jennifer White, Consumer Education Specialist

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