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Will Getting A Loan Modification Hurt Your Credit Score?

Posted on March 20 By Justin McHood

Many people who are getting a loan modification are finding out that their credit score is suffering.

It appears that in some cases, when a lender agrees to a loan modification, the credit bureau is notified and the result is a lower credit score.

Even if you have been on time with your mortgage payment, participating in a loan modification program (for example the Home Affordable Modification Program) can reduce a borrowers credit score by as much as 100 points - which will make the cost of getting additional credit much higher for them in the future.

Some housing counselors think that the practice is unfair, but many people at the credit bureaus think that the practice is fair and reflects the true risk of extending credit to someone.

Perhaps the most important thing is not whether or not getting a loan modification can hurt your credit score, but the fact that the borrower getting a loan modification should be told up front. If someone getting a loan modification thinks that their credit won't be affected, they should be warned by the lender and the housing counselor that their credit could be affected.

According to a story in Yahoo Finance: Jim Owens, 46, of Harrisburg, Ore., was accepted on a trial basis for the Obama plan last year.

He and his family were in bad financial shape. They were barely able to pay the mortgage and utility bills.

The main reason: After being laid off and unemployed for six months, he took a job as maintenance director at a retirement home. But it paid only around $25,000 year, about $10,000 less than his former job in a city public works department.

He and his wife were also struggling with debt, after taking out a second mortgage four years ago to pay off debt and medical bills.

Late last year, he was searching for a used sport-utility vehicle. He got a 30-day approval for $2,000 car loan.

But that time ran out before he found a car, so he had to reapply for the loan. He was shocked to learn that, after signing up for the Obama plan, he was denied.

"I should have been told," that this might happen, Owens said. "Without credit, you can't do a whole lot in life."

So when considering getting a loan modification, be aware that it will most likely affect your credit score - and not in a good way.

Still, the impact is far less severe than a foreclosure, where borrowers typically find their credit is in tatters for years. That's due to the cumulative impact of many months of missed payments and the foreclosure itself, which drags down a homeowner's' credit by 150 points or more on a scale of 300 to 850.

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1 Responses to "Will Getting A Loan Modification Hurt Your Credit Score?"
  1. em 20, Jan, 2010

    How on earth could you say that by putting this in place it will be tougher to get an FHA loan? So often we have buyers that have the money...they just don't have the credit score, I am so happy to hear about this!!! Truly my prayers have been answered.

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