Probably the biggest confusion about loan modifications. This is when the lender agrees to change the terms of your mortgage to make it more affordable or perhaps help you get your loan back after a temporary financial hardship.

Technically, a loan modification should have no negative impact on your credit score. This is because you and the lender have agreed on new terms to cancel your loan, so if you continue to comply with these terms, there should be nothing negative to report.

Probably the biggest confusion about loan modifications. This is when the lender agrees to change the terms of your mortgage to make it more affordable or perhaps help you get your loan back after a temporary financial hardship.

Technically, a loan modification should have no negative impact on your credit score. This is because you and the lender have agreed on new terms to cancel your loan, so if you continue to comply with these terms, there should be nothing negative to report.

However, you will receive some damage to your credit rating if you missed some payments or made some partial payments during the months before the approval of the loan modification. If so, missed or partial payments from the Consumer Data Industry Association will affect your credit, but the loan modification itself will not.

There have been some problems with bad credit for people who have obtained loan modifications under the government’s Making Home Affordable program. In this case, the problem is that borrowers who obtain loan changes have to go through a three-month trial period at the new reduced payment level before the loan changes are finalized.

In many cases, these test payments were reported to the credit bureaus as partial payments because the new payment schedule was not yet fully approved. Part of the problem is that the credit bureaus didn’t have a code to represent test payments, so lenders were asked to report them as partial. However, as of November, a new credit code was implemented specifically to report test payments in a loan modification program, which should help correct the problem.

Refinancing shouldn’t hurt credit

If you simply refinance your mortgage at a lower rate to lower your monthly payments, it shouldn’t have any negative impact on your credit. Refinancing the mortgage is practically paying off

Your existing mortgage by taking out a new one, so there is nothing negative to report. You will need good credit to refinance your mortgage first.

One point where refinancing a mortgage could have a negative impact is if you are trying to secure another major loan, such as buying a car or boat, within a few months of refinancing. Because refinancing is an important new loan, lenders may look at it with suspicion and try to get another loan soon, even if you have reduced your debt obligations.

Another way a refinance could damage your credit is if you do a short refinancing. In this situation, your home has lost value and the lender agrees to write down the principal and issue a new loan. It is often a difficult agreement to reach, although, in today’s market environment, lenders may be more complacent than ever. However, it will appear on your credit score as a debt cancellation for the next seven years.

Short sale recorded as cancellation

A short sale, mentioned above, is when the lender allows you to sell the property for less than the balance owed on the mortgage to avoid foreclosure. Sometimes this is an attractive deal for lenders, as the property’s reduced value still exceeds what you would expect from a foreclosure sale and is also much less expensive to process. However, it conveys your credit score as debt cancellation, although the impact is considerably less than a foreclosure.

Foreclosure law is when a homeowner who can no longer pay the mortgage payments simply signs the property to the lender. Opinions on this issue are different. Some claim that it is better for your credit than a direct foreclosure because you are completing the foreclosure process prematurely and reducing the number of late payments that appear on your record. Others say that it is the same as a foreclosure and that it will have essentially the same impact on your credit. Either way, you will stay in your relationship for seven years.

A foreclosure has the most serious impact, although the impact will be much greater on someone with good credit than on someone whose credit has already been damaged. A foreclosure can lower your credit score by as much as 200-300 points and remain on your credit report for seven years, although the initial impacts will moderate over time.

This has been a very difficult year financially for many people, especially for homeowners. Foreclosures and bankruptcies are two financial events that can adversely affect your credit. Trying to avoid both is a big challenge now with the uncertainty that homeowners may face when the concession period ends.

Many people have asked me about the effects of a loan modification on their credit. The long-term impact of credit can be positive or negative depending on how your lender reports to credit reporting agencies. An initial drop in your credit score may result in a loan modification, but at the same time, it will have a much less negative impact than closing, bankruptcy, or a series of late payments.

Unfortunately, borrowers looking for a loan modification are experiencing some degree of financial difficulty, and many start-ups will either be inpatient or make late payments (defined as 30 days or later for credit reports). Therefore, your credit score is already having a negative impact. Some lenders may not consider loan modification until the borrower begins to fall behind with their mortgage, although this is not the case for all lenders. So, it is really about how the loan modification is reported to the credit reporting agencies.

Lenders often report a loan modification to the credit bureaus as a type of settlement or adjustment of the loan term. Failure to meet the original terms of your loan can harm your credit. However, the effect will always be shorter than a string of missed payments or foreclosures. Unfortunately, this is a problem for homeowners who have to make a crucial decision about what to do after they get out of their tolerance under the CARES law.

Some lenders may not report a change as a transaction, which means that your credit will not be affected. In this case, your credit score could even improve, as your monthly payment would be reported as reduced. When negotiating a loan modification, ask your lender how he informs you. They can also agree not to report this as an adjustment, especially if you’ve been a good customer over the years.