Why does a modification affect your credit

These loan alterations are designed to lower your monthly payments. But if you have your eye on your credit score and are wavering about going forward with a modification, there are a few key factors to keep in mind. Depending on you and the program you choose, the modification may affect your credit scores. If you have a government-backed loan or a government-insured loan through departments you may qualify for the Home Affordable Modification Program HAMP.

HAMP is a government-sponsored program to help homeowners modify their mortgages and make monthly payments more affordable. Some lenders may report a modification as a debt settlement, which will have an adverse impact on your credit score. To make sure your credit score is protected, ask your lender how they plan to report the modification to credit bureaus before you finalize the deal.

Once your modification is in place, you can use it to improve your credit score. Your lender will report your payment history to the credit bureaus, and if you pay on time each month your credit score will gradually increase as you build up a solid payment history. On the flip side, if you fall behind on your payments under modification, the lender will report this as well. A foreclosure will have an enormous impact on your credit score and a lasting impact on future homeownership.

It may be a year or more before you can qualify for a loan again. Mortgage modification agreements revise the terms of home mortgages. They can be used for lowering mortgage rates, extending the repayment term of mortgage loans and adding past due payment amounts to a mortgage loan.

Mortgage companies use modification agreements for lowering mortgage interest rates. Modifications are also used for lowering interest rates for homes that have lost value and do not qualify for traditional refinancing.

Modifying mortgage loans can motivate homeowners to stay in homes an inability to refinance to a lower mortgage rate may otherwise cause them to abandon.

A modification may incorporate additional adjustments to the terms of a mortgage loan according to individual homeowner situations.

A modification agreement can lower the mortgage rate and extend the repayment term of a mortgage, or it may change the type of loan from an adjustable to fixed rate mortgage. Mortgage lenders may extend the term of a mortgage loan for lowering payments and assisting homeowners with bringing their mortgage payments current. A year mortgage requires monthly payments.

A borrower whose income drops after several years of owning her home and making mortgage payments may ask her mortgage company for a modification that includes lowering her mortgage rate and extending the term of her mortgage to the original months.

In cases involving adding delinquent mortgage payments to the mortgage balance, the mortgage term is typically extended by the number of monthly payments added to the mortgage balance. Mortgage modifications revise the terms of home mortgage documents. They can be used for lowering mortgage rates, extending the repayment terms of mortgage loans and adding past due payment amounts to a mortgage loan. When past-due payment amounts are added to the balance of a mortgage loan, the payment due date is also adjusted and shown in the modification agreement.

If past due payments for September, October and November payments are added to the mortgage balance, and a loan modification is effective Dec. Modifying a delinquent mortgage to a current status will show the delinquent payments as current, but does not erase initial reporting of the delinquency on credit reports. Mortgage companies approve modifications based on verifying homeowner hardship and homeowner ability to repay the mortgage according to its modified terms. Supplying all information and documentation requested by your mortgage lender speeds up the modification approval process.

Check on the status of your modification request weekly. Your mortgage servicing company may have to get approval of your mortgage modification from the owner of your mortgage or a mortgage insurance company. A load modification is the result of a negotiation between a borrower and lender, typically over a large loan like a mortgage.

Modifications help both sides compromise when the borrower cannot make the current monthly payments. This can save the borrower from foreclosure and credit damage, but the modification may also create tax complications.

Refinancing entails replacing your loan with a new mortgage, whereas a loan modification changes the terms of your existing loan. Getting a mortgage loan modification could mean extending the length of your term, lowering your interest rate or changing from an adjustable-rate mortgage to a fixed-rate loan.

Though the terms of your modification are up to the lender, the outcome is lower, more affordable monthly mortgage payments. Foreclosure is a costly process for lenders, so many are willing to consider loan modification as a way to avoid it. Not everyone struggling to make a mortgage payment can qualify for a loan modification. In general, homeowners must either be delinquent or facing imminent default, meaning they're not delinquent yet, but there's a high probability they will be.

Reasons for imminent default include the loss of a job, loss of a spouse, a disability or an illness that has affected your ability to repay your mortgage on the original loan terms. Some lenders and servicers offer their own loan modification programs, and the changes they make to your terms may be either temporary or permanent.

The federal government previously offered the Home Affordable Modification Program, but it expired at the end of Now, Fannie Mae and Freddie Mac have a foreclosure-prevention program, called the Flex Modification program , which went into effect Oct. If your mortgage is owned or guaranteed by either Fannie or Freddie, you may be eligible for this program. HARP has also expired. If you are struggling to make your mortgage payments, contact your lender or servicer immediately and ask about your options.

Refinancing your mortgage is basically paying off your existing mortgage by taking out a new one, so there's nothing negative to report. In fact, you'll need good credit to refinance your mortgage in the first place. One place a mortgage refinance might have a negative impact is if you try to take out another large loan, such as a car or boat purchase, within a few months of refinancing. Since the refinance is a new major loan, lenders may look askance at you seeking to take out another so soon, even though you've actually reduced your debt obligations.

Another way a refinance might damage your credit is if you do a short refinance. In this situation, your home has lost value and the lender agrees to write down the principal and issue you a new loan. You're basically doing a short sale see below to yourself. This is typically a difficult arrangement to obtain, although in the current market environment, lenders may be more accommodating than in the past.

Still, it's going to show up on your credit score as a debt writeoff for the next seven years. A short sale, mentioned above, is when the lender allows you to sell the property for less than the balance owed on the mortgage in order to avoid foreclosure.

This is sometimes an attractive arrangement lenders, because the marked-down value of the property still exceeds what they could expect to get out of a foreclosure sale and is far less costly to process as well.

Still, it goes on your credit score as debt writeoff, though the impact is considerably less than a foreclosure itself. A deed in lieu of foreclosure is when a homeowner who can no longer afford mortgage payments simply signs the property over to the lender.

Opinions on this are mixed.