How Will Getting A Loan Modification Impact My Credit?

One question that we hear quite a bit from people who are facing foreclosure is how their credit is likely to be impacted if they pursue and obtain a loan modification from their lender. Obviously, when one has missed several payments on a loan, that will cause a credit score to deteriorate rapidly. Getting a loan modification will not erase this fact. However, obtaining a successful modification is far better than having a foreclosure on your credit report. Let's look at the past and current impacts of a modification on your credit score.

Inconsistency With Loan Modification Reporting

Loan modification is one of the most widely sought-after methods of preventing foreclosure. It is appealing in that it:

1. Allows the borrower to stay in the home, and
2. Allows for the institution of a smaller payment amount which the borrower might be able to more readily meet.

The downside of mortgage modification is that in recent years, the government has not had very clear rules surrounding how lenders and credit agencies should report a loan modification in a borrower's credit score. Some lenders would apply an annotation to modified loans that they were "paid as agreed", while others might mark the loans as being in "partial payment" status, or even still in foreclosure until the missed amount is made up.

This inconsistency has created a great deal of confusion among both borrowers and lenders as to the long-term impact of a modification on one's credit. A standardization has been needed for some time in order to allow distressed borrowers to further assess their situation before proceeding with a modification or some other strategy.

New Reporting Rules

Luckily, on November 1 of 2009, the government instituted a new rule that requires lenders to use a consistent reporting standard throughout the industry, at least for government-subsidized mortgage modification plans. This new rule requires banks to report modified loans to credit agencies with a status of "loan modified under a federal government plan".

What is still unclear is how lenders will view this designation in the future. The current financial crisis has many victims who have been rendered incapable of keeping up with their mortgage payments. Many of these individuals are people who had stellar credit histories up until now. Very likely, lenders will take into account how a person has used credit up until the crisis that required their loan modification, as well as how he or she manages obligations after receiving the modification.

The Long-Term Impact of Modification on Your Credit

There is no doubt that a loan modification status on your credit history will have a negative impact on your credit overall, but that does not mean that you will not have access to credit in the future. Nor does it mean that you will not be able to overcome this challenge. The key is to start acting now to put yourself back into the drivers seat and get back on your feet.