There’s a lot of information floating around out there about how loan modifications affect your credit score.  Some people say yes it does, and some say not at all.  The answer really lies in how the lender decides to report it and also in what type of modification a borrower is getting.

To put it in the simplest of words, getting a loan modification means that the lender is not getting as profitable of terms as the original agreement.  The lender almost always loses because they are reducing principal balances or interest rates.  Because of this fact alone, the lender will usually report something negative to your credit report.  So, most of the time, obtaining some sort of loan modification should affect a borrower’s scores because they are not meeting their original obligation.

There currently is no ‘code’, or specific way, for a lender to report a loan modification to the credit bureaus.  I’ve seen it report in the form of late payments, charge-offs, settled debts, or just as comments in the comment section.  If a lender reduces the principal amount of the loan, they sometimes report it as ‘paid for less than the balance owed’, which is not good. If the principal balance isn’t being reduced, and just the payment / rate is changing, this could have no effect on your credit since payments and rates are not part of the credit scoring model.

Some lenders won’t even consider a loan modification unless a consumer is 90 days late – and getting to that point definitely hurts your credit.

I’ve heard of larger lenders like Chase and Citi give their 3 month trial period, telling consumers that they’ll stop reporting to the credit bureaus during that period, and then afterwards reported that whole time as late payments….so you have to be careful.

Once many loan modifications are complete, the lenders will report the loan as ‘current – pays as agreed’. However, that will not remove any derogatory history that occurred before that.  If a borrower had late payments, etc., that will still report negatively on the credit report.  Also, the amount delinquent plays a role in the credit score too.  If someone went 90 days late before the modification, his or her credit will be hurt far more than a borrower who only went 30 days late.

My advice: Negotiate with your loan holder exactly how the modification will be reported to the credit bureaus.   Sometimes they’ll agree to keep it clean and then it won’t affect your credit score one bit.

I frequently get asked the questions, “How does a Short Sale affect my credit score?”, or “What’s the difference between a short sale and foreclosure with my credit?”.  These are great questions and the answers are often convoluted.  Here’s the real skinny.

While a short sale may be a good move financially when you can’t find someone to buy your home for the full loan amount, it still has very serious credit implications. It is very likely that your credit scores will suffer greatly because of the short sale and believe it or not, may have the same implications as a foreclosure.

The reason that your scores will suffer is because of how your mortgage lender will report the loan to the credit reporting agencies.  Remember: Credit scores are smart…but they are only as smart as the information reported by your lenders.

The ONLY way that credit scores know that you’ve disposed of your mortgage via a short sale is if your mortgage lender chooses to report that to the credit bureaus.

There are two ways that the loan can be reported:

1. “Settlement accepted on this account.”
2. Or  “Settled for less than the full loan amount.”

The exact verbiage will vary by bureau but they all mean the same thing…that the loan was not paid in full according to the terms of the original loan agreement.  Short sales and deeds-in-lieu of foreclosure are all “not paid as agreed” accounts, and considered the same by the scoring model.  Scoring models will consider short sales or deeds in lieu to be a serious negative item, and in fact, will come out just as bad for your credit or FICO scores as a foreclosure.

To make a long story short:  short selling, deed in lieu, and foreclosure all affect your credit score the same way.

If you are in a situation like this, contact us at Wellness Credit to see what credit solutions we have for you.