How mortgage modification affects your credit depends on your personal situation. Mortgage modification may kill two birds with one stone, saving your credit rating and your home. Alternatively, mortgage modification can require you to ruin your credit rating and may not not save your home from foreclosure.
Identification
Nothing negatively affects your credit rating unless a lender reports it to the credit reporting bureaus. However, mortgage modification often results in a negative notation on your credit history, because you do not pay in accordance with the original mortgage agreement. Also, some lenders only modify a loan after you have missed at least one payment. One missed payment can take over 110 points off your FICO credit rating, and a 90-day late payment could mean a loss of 135 points, according to Les Christie of CNN.
Making Home Affordable
You do not have to purposely miss payments to obtain a mortgage modification. The federal government has the Making Home Affordable program until at least 2013 for homeowners who cannot afford their home. While lenders report a Making Home Affordable mortgage modification as under a federal government loan program, participation in MHA does not damage your credit score as long as you enter the program current on payments and make on-time payments while in the program.
Benefits
Taking part in any mortgage modification may be the best thing for your credit rating in the long run. Defaulting on payments can make you too risky to lenders, and a record of non-payment stays on your credit report for seven years. Mortgage modification may also help you avoid foreclosure, which you may value more than your credit score. A lower monthly payment or interest rate, common concessions by a lender under mortgage modification, may free up income to help you make on-time payments on other accounts.
Tip
Ask the lender how it will report a mortgage modification and negotiate for the bank to report the account as "pays as agreed." Whatever the lender acquiesces to, get it in writing, because oral agreements are much more difficult to enforce. Watch out for fraudulent credit repair companies that claim they can save your credit score and your home. Some try to take your money and run, or get you to sign over the deed to your home, according to the Federal Deposit Insurance Co.
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