Real Estate & Personal Finance: How Does a Mortgage Loan Modification Affect Your Credit Score?
Credit Score Basics
Your credit score is a number that a credit reporting agency assigns to you that summarizes how likely you are to repay credit and loans. Three major agencies dominate the credit reporting industry, and all use a scoring system called FICO, created by a company called Fair Isaac. The score ranges from 300 to 850. Whenever you apply for a loan or credit, you can expect the lender or credit supplier to request your credit score from the three agencies before agreeing to borrowing arrangements with you. Several factors can affect your credit score, including your payment history, amount owed, length of credit history, types of credit used and new applications for credit.
Mortgage Loan Modifications
Your lender can modify your mortgage by extending the loan period, reducing the interest rate or forgiving part of the amount you owe. It might require patience and paperwork to receive a loan modification, as lenders are often reluctant to grant one. Missing a mortgage payment might make it easier to negotiate a modification, but it also will cause your credit score to drop. According to Fair Isaac, a 30-day delinquency could cause your FICO score to drop 80 to 110 points.
Dilemma of Missing Mortgage Payments
You may not be able to protect your credit score if the lender insists that you first miss a payment before it considers a modification. According to registered investment adviser Elisha Zaretsky, “A mortgage modification may affect your credit score – it depends on how the lender reports the modification to the credit bureau. If the lender tells the credit bureau you did not make payments as originally agreed, it could negatively affect your score. Therefore, to maintain your credit score, it is best to make your mortgage payments on time during the modification process.”
Federal Assistance With Mortgage Modification
The federal government has pulled together an assortment of programs under the Making Home Affordable initiative. The Home Affordable Modification Program works with lenders to arrange mortgage modifications before the homeowner misses a payment. However, you have no guarantee that a modification won’t still hurt your FICO score even if you make all payments on time, because you altered your original agreement with the lender. While a modification might cause some damage, a foreclosure can ruin your credit score for seven years. To help avoid foreclosure and improve your chances for a modification, you can receive free help from housing counselors approved by the U.S. Department of Housing and Urban Development.