How Modifying Your Mortgage Affects Your Credit Score

By Author: Nick Adama
Total Articles: 197
Comment this article

One of the largest concerns shared by many homeowners who have missed several mortgage payments is what options are available to them, and how each option can affect their credit rating. While these owners know that their credit has deteriorated rapidly due to the foreclosure situation, they also want to preserve as much as possible their chances of borrowing money in the future.

Loan modification is the most recent trendy method to stop foreclosure, with numerous government programs subsidizing banks and homeowners. Thousands of foreclosure consulting organization offering to help borrowers negotiate with the banks (for a fee) have also sprung up all across the country.

While modifying the terms of a mortgage can be a great plan for some borrowers, few people have really questioned how a modification will be presented to the credit agencies. They are somewhat similar to refinancing a home, entering into a forbearance agreement with a bank, and even filing a Chapter 13 bankruptcy.

Government regulations, until very recently, have also been hazy as to how lenders should report a loan modification on clients' ...
... credit histories. Some lending institutions would have the record state "paid as agreed," while others would account for the payments as "partial payments." Some would even just keep the loan in a state of "foreclosure" until the temporary modification or repayment plan was completed.

All of these different ways had widely varying effects on a borrower's credit score. Having a loan shown as "paid as agreed" was obviously the best solution. Partial payments is considered a drawback to prospective lenders and would cause a decrease in the credit score. Having a credit report demonstrate a foreclosure would be almost as bad as just having filed bankruptcy and discharged all of the debt.

The new rule requires that banks report a mortgage change to the credit rating agencies as "loan modified under a federal government plan." Another necessity is that this designation will have no effect on the borrower's credit (FICO) score. This is mostly due to the relatively small number of owners who have received a modification to avoid foreclosure.

When there are more mortgages with the federal government designation, then the credit rating agencies will be able to decide how to change the debtors' scores. This will mandate more modifications to go through and past ones not to degenerate back to foreclosure status.
Nick publishes articles for the ForeclosureFish website, which teaches borrowers how to save their properties from foreclosure. His site describes various strategies to avoid losing a home, including mortgage modification and deed in lieu. Visit today to receive a free e-book on how foreclosure works and how to stop it: http://www.foreclosurefish.net/