By Charlestien Harris
This has been a very difficult year for many people when it comes to finances, especially for homeowners. Foreclosures and bankruptcies are two financial events that can have a really adverse effect on your credit. Trying to avoid both of those can be a real challenge right now with the uncertainty homeowners may face as their forbearance period comes to an end.
Many have asked me about the possible effects of a loan modification on their credit. The long-term credit impact may be positive or negative depending on how your lender reports it to the credit bureaus. A loan modification can result in an initial drop in your credit score, but at the same time, it’s going to have a far less negative impact than a foreclosure, bankruptcy or a string of late payments.
Unfortunately, borrowers seeking a loan modification are already in some kind of financial difficulty and many will have already begun missing or making late payments (defined as 30 days or more late for credit reporting purposes). Therefore, their credit score is already being negatively impacted. Some lenders may not consider a loan modification until a borrower begins to fall behind on their mortgage, although this is not the case of all lenders. So, it really boils down to how the loan modification is reported to the credit bureaus.
Lenders will often report a loan modification to credit bureaus as a type of settlement or adjustment to the terms of the loan. If it shows up as not fulfilling the original terms of your loan, that can have a negative effect on your credit. However, the effect will be less and of shorter duration than a string of missed payments or a foreclosure would have. Sadly, this is like a catch-22 for homeowners having to make a crucial decision about what to do next when coming out of the forbearance they were granted by the CARES Act.
On the other hand, some lenders may not report a change as a settlement, meaning your credit would be unaffected. In this case, your credit score could even improve, because your monthly payment would be reported as decreased. When negotiating a loan modification, ask your lender how they report it. They may even agree not to report it as an adjustment, particularly if you’ve been a good customer over the years.
As a HUD certified housing counselor, I can’t say this enough! Check your credit report often, especially since you can now pull your reports once a week at no charge from all three credit bureaus, as part of the CARES Act. Free weekly credit reports last through April 2021. Check yours today at https://www.annualcreditreport.com.
You want to make sure your lender is reporting your mortgage properly, either in forbearance or paying as agreed, but not late. If the information on your credit report is incorrect, you can dispute it with the credit bureau. Under the Fair Credit Reporting Act, the bureaus generally have 30-45 days to investigate a dispute and delete the information from your file unless it’s confirmed.
It is very important to remember that a loan modification will more than likely have a larger impact on your credit than refinancing your mortgage. A loan modification changes the terms of your existing mortgage, while a refinance is simply obtaining a new mortgage on better terms. A refinance should not have a negative impact on your credit, other than possibly a small, short-term effect due to taking out a new loan and having your credit report pulled during the loan process.
As always, you should contact a HUD-Approved Counseling Agency to get more information about this subject. A list of agencies, including Southern Bancorp Community Partners and other resources can be found at https://southernpartners.org/housing-counseling/. You can also email me with your questions at Charlestien.harris@southernparters.org. Until next week, stay financially fit!