USAToday reported on the impact of loan modifications on credit scores this week. Selected paragraphs:
A growing number of cash-strapped consumers are working with lenders to modify their mortgages so they can stay in their homes. But these modifications could wreck consumers’ credit.
A modification is typically a change in loan terms. Usually, the interest rate is reduced temporarily to lower monthly payments. The amount of principal owed isn’t changed, and no debt is forgiven.
But such arrangements can damage a credit score because of the way lenders report loan modifications to credit bureaus. Under Credit Data Industry Association rules, loan modifications are reported as “partial payments.” This could result in “a serious hit to your score,” Ulzheimer says. “The argument we keep getting is that if you modify your loan, it means you can’t afford it,” he says. “That’s not true. If you modify a loan, that could be a … decision to lower your payment.”
Borrowers who have done a loan modification may not know that their score has been hurt until they’re rejected for a loan or get a notice that their credit card account has been closed, he says.
Before entering into a modification with any lender, including a mortgage company, consult a qualified counselor who can review the documents and advise you on the best course of action.