Mortgage modification is a change made to the terms of a mortgage loan by the lender due to the inability of a borrower to pay back the loan through the original loan term. Generally, loan modification is done to make repaying the loan more affordable for borrowers and to avoid defaults. It is often advisable to modify your mortgage loan to make repaying the loan easier, but does a mortgage modification hurt your credit?
Exploring mortgage modification options typically indicates that you’re experiencing challenges in keeping up with your loan payments. While this modification can help make the loan more affordable to repay. It is vital to be aware of whether it affects your credit or not. However, how this affects your credit depends on your mortgage lender and how much risk your action poses. Before opting for a mortgage modification, read through this article for insights on how this action affects or impacts your credit.
Can a Mortgage Modification hurt your Credit?
As mentioned earlier, mortgage modification occurs when a lender adjusts the terms of a loan to help a borrower who is struggling to make payments. These changes include extended repayment terms, lower interest rates, lower loan balances, and adding your loan in forbearance.
To make loan repayment more affordable to borrowers, lenders decide to modify the mortgage loan. However, depending on the lender and its modification requirements. Along with how amendments to the original loan term are reported, this action may affect your credit negatively. Irrespective of the credit damage it poses, mortgage modification may still be the best way to make loan repayment easier.
How Does A Mortgage Modification Hurt Your Credit?
There are different ways mortgage modifications can hurt your credit. Both in short and long loan terms, modification can affect your home through the following methods:
- Late Payments: Mortgage modification is most times available only to borrowers who are having difficulties with their loan repayments. In cases where you miss one payment or pay late, your credit score may be damaged.
- May be Recorded as a Settlement: Since you are changing your mortgage loan terms, some lenders may inform credit bureaus that your mortgage modification is a settlement. This action can damage your credit score and remain on your credit history for many years.
- Can Avert Foreclosure: Although your credit may be affected, mortgage modification can help you prevent foreclosure. However, this may cause more damage to your credit.
- Modification May Have a Positive Impact on Your Score: If opting for a mortgage modification makes your loan repayment easier, keeping a positive repayment record may help raise your credit score.
However, you cannot predict how exactly mortgage modification affects your credit. Before opting for this method, check with your lender about how this action will be recorded. Whether it will hurt your credit score, and how much damage will be done.
Why Should I Go for Mortgage Modification?
One of the common reasons why homeowners may opt for mortgage modification is when they have financial difficulties repaying the loan. Other reasons include job loss and large debt amounts accumulated. And payments for unforeseen expenses like medical bills that have affected their ability to repay the mortgage loan.
When finances get tight, borrowers tend to look for other ways to pay back their loans. Through mortgage modification, they can easily repay their loans without having to default the loan. Although this process may harm your credit score, it allows borrowers to get new loan terms, loan amounts, and interest rates that fit better into their budget.
How Long Does a Mortgage Modification Remain on My Credit?
In cases where the lender reports your modification as a settlement, the impact on your credit report may last for seven years. However, it may be less depending on how your lender handles your loan modification.
Can I Refinance My Mortgage Loan After Modification?
It is possible to refinance your mortgage after modification, but you may be required to wait for a specific period before refinancing. This waiting period may last a year or more, depending on the lender.
How Does Mortgage Modification Hurt My Credit Compare to Forbearance?
These two actions have a similar impact on your credit. If missed payments are reported by a lender through forbearance, your credit will be affected just like it would with a modification. It is best to avoid this impact on your credit either through any of these processes you find yourself.