How Does a Loan Modification Affect Your Credit Scores?

Quick Answer

A mortgage loan modification can hurt your credit if the lender reports it as a settlement, but it can also provide long-term benefits for your credit history.

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If you're pursuing a modification to your home loan payments, you're already experiencing some financial difficulty. But while a loan modification can help make your payments more affordable, it's important to understand how restructuring your debt in this way can impact your credit score and what you can do about it.

Can a Loan Modification Hurt Your Credit?

A loan modification may involve extending your loan's repayment term, reducing your interest rate or loan balance or putting your loan in forbearance. Lenders offer loan modification because making your monthly payments more affordable can minimize the chance that the lender will need to foreclose on your home, which can be costly.

But, depending on the lender and how it reports the amendment to your original agreement and what it requires before you qualify for modification, it could negatively impact your credit scores. Despite the potential for credit damage, however, a loan modification can still be the right move in the long run.

Ways Loan Modification Could Impact Your Credit

There are a few ways a mortgage loan modification can affect your credit score, both in the short and long term:

  • Missed payments: Loan modification is often available only to borrowers who are already delinquent on payments or nearing default. If you haven't gotten to this point yet, missing just one payment could damage your credit score significantly.
  • Could be reported as a settlement: Because you're changing the terms of your loan, some lenders may report your loan modification to the credit bureaus (Experian, TransUnion and Equifax) as a settlement, which can wreak havoc on your credit scores and remain on your credit reports for several years.
  • Could prevent foreclosure: While there is a possibility of your credit score taking a hit, modifying your loan terms could help you avoid foreclosure, which could have an even greater negative impact on your credit score.
  • Could be a long-term positive for your score: If a loan modification makes it easier for you to keep up with payments, maintaining a positive payment history going forward can help improve your credit score over time.

Unfortunately, there's no way to predict exactly how a modification might impact you. You can ask your lender about how it will be reported, but whether your credit score will drop and by how much ultimately depends on your overall credit profile.

Is Loan Modification a Good Idea?

While it's possible for a loan modification to negatively impact your credit score, it's important to look at the big picture to determine if it's the right move for you. Here are a few things to consider:

  • Much of the damage may already have been done. If you've already missed one or more mortgage loan payments, your credit score has likely already taken a hit. While a settlement can make things worse in the short term, it'll typically fall off your credit reports seven years after the first missed payment instead of resetting the clock.
  • Foreclosure can be worse. Foreclosure indicates that you've defaulted on your loan agreement. In addition to significant damage to your credit score, a foreclosure can also keep you from buying another home for anywhere from two to seven years, depending on the loan program. It can also destabilize your life and financial well-being in other ways.
  • Negative marks don't last forever. While it may take several years for derogatory marks associated with loan modification to fall off your credit reports, their impact can diminish over time. This is especially true if you commit to paying your bills on time, which a loan modification can help facilitate.

Before you make a decision about your mortgage loan, carefully consider your situation and your goals. You may also consider consulting with a qualified credit counselor who can provide you with free personalized guidance.

Monitor Your Credit to Avoid Surprises

Understanding how your actions impact your credit score can help you determine how to address potential issues and track your progress as you work to increase your credit score over time.

With Experian's free credit monitoring service, you'll be able to view your Experian credit report and FICO® Score anytime, giving you the details you need to make informed decisions. You'll also get real-time alerts when changes are made to your credit report, making it easier to keep an eye on new developments and make adjustments as needed.