Loan Modification and Your Credit Score

Thousands of homeowners continue to look to the government for loan modification programs that claim to help them save their home.  But, what impact does a trial modification really have on their on credit score?  Many people think that they are protecting their credit by making these modified payments. However, a recent article posted on CNNMoney.com suggests that these trial modification payments can actually harm your credit score.

Impact on Credit

It is important to note that many of the people applying for government help are already delinquent on their mortgage payments, which of course does significant damage on their credit score.  Further, obtaining a trial modification shows that these homeowners cannot fulfill their original obligation.  The article sites an example of a municipal employee living near Chicago who saw his credit score plummet from a 750 score to 644 after he obtained a $565 reduction in his monthly mortgage payments.

Advocates of these loan modification programs point out that if a borrower is seriously delinquent, making these modification can actually help improve their score.  However, even if a borrower is lucky to obtain a permanent modification, the delinquency can still be reported for up to seven years.

Loan Modification vs. Bankruptcy Protection

Homeowners in these modification programs need to be aware that their credit score may suffer as a result.  They may find it more challenging to get loans, such as car loans.  So if you are a homeowner avoiding bankruptcy because you fear your credit score will be damaged you should be aware that much damage to your score may have already been done.  Chapter 7 Bankruptcy offers many people the option of getting a "fresh start" by eliminating a great deal of the debt that may have led to the delinquency issues in the first place.  You should talk with a bankruptcy lawyer to consider what options are available.  Maybe by eliminating your unsecured debt such as credit cards, you may actually be able to save your home.