If you are a homeowner faced with foreclosure, you may be able to modify your mortgage as a way to remain in your home. While a modification should make your loan more affordable and provide a way to keep your home, you should be aware of how the action will appear on your credit report and how it might affect your score.
Before Modification
If the modification has been prompted by late payments or a default of 30 or 60 days, this negative information has already been reported to the credit bureaus and it will affect your score. Late payments on a major loan such as a mortgage can ding your score significantly, especially if you had good credit before.
Modification
The modification will be reported to the credit bureaus. However, there is no standard form of words that deals with modification, and how it appears on your report may vary. It could be reported as a settlement or charge-off of the original loan with a new account being opened. Or it may be termed as a change to the loan balance and the payment terms of the old loan. The latter will have considerably less of an effect on your credit score
Negotiation
If you have built up a good relationship with your lender, and you have cooperated well over the modification, it's a good idea to ask how the lender intends to report the change on your credit. Lenders have discretion as to how the wording will appear on your report, so ask if the company will report it as a modification rather than a settlement and new account. Ask for this in writing.
Rebuilding
The report of your modification will remain on your credit for seven years. However, the effect will fade with time. If you keep up regular, timely payments on the new loan, that will go a long way toward repairing your credit and mitigating the effect of your modification.
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