Did My Credit Score Take a Hit Do to a Loan Modification?
A loan modification occurs when an individual requests that the lender make changes to the terms of the loan in the hopes of making it easier for the borrower to repay the debt. It makes sense to go to your lender whenever you are facing financial difficulties and to ask for such a discount or help. However, what you may not know is that there is a connection between a loan modification and credit score. In many cases, you could see a significant drop in your credit score because of this process.
What Is a Loan Modification?
What is loan modification anyway? There are now federal programs that encourage mortgage lenders to work with homeowners to restructure the terms of a loan to make them easier to repay. The lender does not want you to go into foreclosure because this is a loss to them. However, the lender also does not want to tie up its money in a consumer who cannot pay their mortgage. Therefore, not everyone gets approved for loan modification. However, if you do get a bank loan modification it could mean a lower monthly payment, a lower interest rate or even just getting help to get caught up on late payments.
Your Loan Modification and Credit Score
How can reorganizing your loan affect your credit score? The lender has the right to report this information on your credit file. In short, you are not meeting the agreement you originally signed up for and because of that, the company will report it as a negative change on your credit report. It makes sense since most homeowners who do go through the loan modification process are doing so because they need to. Many of them are already behind on their payments.
The Statistics of Drops in Credit Scores
According to some reports, an individual who enters into foreclosure will see his or her credit score plummet by at least 150 points, often times significantly more. On the other hand, if you get a loan modification, loan restructuring of any type, chances are good you could see your score drop by as much as 100 points. It is less severe than entering into the foreclosure process. More so, when you get a mortgage modification you can work to rebuild your score using that loan and you get to keep your home. If you go through foreclosure, you will lose your home and damage your ability to get another.
For many people, this drop in a credit score after loan modification should be seen at something that is going to happen. Even if your lender does not tell you that it will happen, it could. By being ready for it and working to increase your score afterwards, you could see a significant increase in your score in the long term.