Loan Guide

For many homeowners, a loan modification can provide welcome relief for high mortgage payments, stop foreclosure, and in some cases, even lower principal balance, or amount owed, on the mortgage. It is important, however to address the ramifications on ones credit for achieving a loan modification.

Many lenders will not consider granting a loan modification to clients that are not currently delinquent on their mortgage, regardless of hardship. Going 30 days late or for a longer duration can significantly lower your credit rating; those with near perfect credit ratings may see a decrease in their credit score of hundreds of points.

A decrease in your credit score may preclude you from qualifying for additional credit, in the form of installment, revolving, or mortgage debt. The most common installment loans are car loans or personal loans. In terms of immediate effects, missing mortgage payments may prevent consumers from being able to purchase new automobiles, and may cause the low introductory rates on their credit cards to increase.

A loan modification may save a homeowner thousands of dollars per month and provide them with peace of mind and financial stability, however, it is important the homeowner realizes the effects on credit that may result. Other loss mitigation services, including short-sales, may have similar effects on one’s credit rating.

On the plus side, if you are considering a loan modification, most likely you are already late on your mortgage, and the financial effects have already manifest themselves, hence a loan modification can only help you in your quest to achieve lower household bills. A loan modification should improve your credit in the long run since the very basis of the modification is to get you back on track financially to make future payments, without defaulting on the mortgage.

Unlike consumer credit counseling, or bankruptcy, loan modifications do not carry a blemish that lasts a number of years on credit. A foreclosure, or short-sale, however, may. The very best thing to do is speak with an advocate or counselor that will help you to determine the pros and cons of pursuing a loan modification, that can also help you draw up a financial prospectus to help you achieve your financial goals, while maintaining your credit rating, or if you are already late on your mortgage, setting up a plan that will help you achieve a higher credit rating as soon as possible.

By: Justin Bartlett