More and more, loan modifications are becoming the norm for many Americans that are faced with different problems that affect their ability to pay their house note. The term loan modification used to be almost unheard of from people and from banks. For those of you who still don’t know, a loan modification is when a bank changes the terms of your original loan that you have with them on your house. This can include changing the amount you owe, the interest rate, or the length of your loan. On the other hand, it can be all three or any combination of the three. It is entirely up to your bank and you as to what can be agreed to.
Now, I cannot begin to tell you how every week I am asked at least one time by someone if getting a loan modification will affect his or her credit score. Many people tell me that they tried to do a modification and had no luck and after I ask them a few questions, they explain that they have never been late and they are a good customer, so why won’t the bank modify their loan. The answer is simple. Banks don’t modify loans of people who are paying and current in most cases. Banks want to modify loans for people who need help or are unable to pay the same amount. If you are just modifying to get a lower payment then banks don’t want to help you. After all, who wouldn’t want a lower payment if the banks were passing them out? Having said all of that, there are some exceptions. If you were to contact your bank and explain, by letter that you anticipate a dramatic change in your income, and were seeking a modification then the bank may respond well but only after receiving documented proof of your hardship. This situation also depends on the bank because each bank has their own modification guidelines outside of the ones imposed on them by the government.
On the other side of the equation, most people who do end up getting a loan modification ARE behind on their mortgage payments. In fact, from my experience banks used to work on a modification if you were behind only 2 to 3 months. Now I notice some banks want you to be fully into a foreclosure before they will begin to discuss a loan modification with you. Therefore, they like to see you 6 months or more behind on your mortgage. Modifications done at this point are looked at more seriously and in my opinion given serious consideration.
So to answer the question, YES, a modification will lower your credit score. It will lower your score initially before you complete the modification because you will fall behind on payments in most cases. Second, it will lower your score because when the bank reports that your loan has been modified then it is telling the credit scoring company that you were unable to maintain your original payment arrangement and credit scoring models look at this almost like a credit default. On the plus side, if your credit is bad before you do a modification, then modifying and making the payments under the modification agreement in many cases will improve your score significantly over time.
Until next week…
Arthur V. Veal IV is the owner of We Buy Houses Home Services, a real estate investment company. They specialize in buying houses on terms. Buying on terms allows them to purchase houses and pay very near retail prices while still selling the house for a profit. His company boasts a 73% success rate when helping sellers sell their property quickly and getting them a price they feel is fair. Find out more about these programs by visiting their site at http://www.sellonterms.com