One of my past clients recently contacted me and is thinking of contacting their lender for a streamline refinance or a loan modification. Before they contacted the lender they reached out to me to answer the question “Will a loan modification lower my credit score?”
To get an answer to the brief question I contacted Brooke Peros, a Credit Coach here in Sonoma County. I didn’t get a brief answer however. Here is how our conversation went:
I have been researching about how a loan modification will affect a credit score. There is no simple black and white answer. If there are already late payments then of course it will lower the credit score as with any account. If there are no late payments then it will depend on how the lender reports the loan after the modification. At the end of the day when the loan is modified IF it is reported as a settlement then it will drop the credit rating. You would see something like, “account settled for less than legal amount owed.” The good news is that not all the lenders do this.
The next part of it is the trial period of the new payment. Sometimes the lender will report late payments during this time because of the new payment being less than the original amount. This shouldn’t happen. The government has set up guidelines that it should be reported as “a modified payment” and not late. This could also impact the score negatively but not as severely as a late payment.
I hope this has added some clarity in a very gray topic. I included a link that I think sums it up fairly well….
Thank you Brooke for your research and in sights. If you need to contact Brooke she gets her email at email@example.com and her website is www.CdCredit.biz. Her specialty is credit repair. I have worked with her to help folks avoid foreclosure, get loan modifications and/or consider short sales of their homes.