How Will a Loan Modification Affect My Credit?

You can save your home through loan modification, and it probably won't mean sacrificing your credit score. On the contrary, loan modification may help your score by preventing a more serious incident from appearing on your report. To be truly sure of the effect of loan modification, query your lender.

Types of Modification

Loan modification might negatively affect your score if you negotiate with a private party. The private lender may report the account as settled if he must forgive part of the loan. The federal loan modification program -- known as Making Home Affordable -- lowered credit scores in 2009, even ones who were current on their payments, because of an outdated reporting code. In 2011, HAMP won't affect your credit score as long as you follow through on the restructured payment schedule.

Potential Harm

Loan modification itself may not harm your score, but the history leading up to it may do significant damage. Most creditors will not consider a loan modification until the borrower appears to have serious financial problems, such as missed payments for more than 90 days, according to Experian. Debt settlement companies often tell customers to stop paying their loans to "force" the creditor to negotiate. A 90-day missed payment can lower your score by as many as 135 points, according to CNN.

Considerations

Borrowers should seek out loan modification assistance before missing payments and ask the lender how he will report loan modification to the credit bureaus. Also consider that even if the lender reports the account as settled, this is still much better for your credit score than letting the home go to foreclosure. A foreclosure, for instance, takes 20 to 40 points more off of your credit score, whereas debt settlement and about 85 points less than a bankruptcy.

Tip

You may have alternatives to a loan modification if you are worried about the potential hit to your score. On credit cards, for example, card issuers typically lower your interest rate immediately just by calling their customer service number. Refinancing the loan can reduce your monthly payments and/or interest rate and only cost you a few points due to a hard inquiry. Keep in mind that modification usually is not that bad -- a 2010 VantageScore Solutions survey found it had a negligible impact on scores.