How Does Loan Modification Affect my Credit Score?

Home owners often resort to a loan modification when they fall behind on payments; a loan modification is viewed as a chance to ward off a foreclosure. But homeowners also need to consider the effect a loan modification will have on their credit score. Indeed, most home owners do and are worried that a loan modification may have an adverse impact on their credit score.

In an ideal situation, if you are up to date with your payments there is no reason why a loan modification will hurt your credit score. A loan modification does not mean that you are borrowing; you are only adjusting your existing loan amount. You should not really have to worry about any adverse impact on your credit score. In fact, when you shift a loan to a smaller interest rate you free up some cash to pay off the principal, this can actually benefit your credit score. In rare cases, the lender may even pardon off a portion of the loan which reduces your loan liability and enables you to work towards bettering your credit profile.

However, if the loan modification is a last ditch attempt by you to avoid foreclosure and in these circumstances if the lender foregoes some of the loan, then it will most definitely be reported to the credit bureaus in an adverse manner.

Another thing that can actually catch home owners off-guard is the tax implication of a loan modification. The IRS considers any loan amount forgiven as income and you have to pay tax on it.

The bottom-line is that everyone’s credit circumstances are unique and a lot depends on how they get factored into your credit score. A lot also depends upon how accurately the lending organization reports on your loan transactions.

What you can do is to try and request your lenders to get to agree to update your modified loan as “current” for the credit bureaus or maybe negotiate beforehand that if it comes to a loan modification the lender will not make an adverse report to the credit bureau.

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How Does Loan Modification Affect my Credit Score?

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