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Loan modifications are all over the place. There are many questions surrounding them and what the effects on credit can be.  This article answers some of the questions that may come up.

How a Loan Modification Affects Credit

By Kevin Redmon

A loan modification may be the solution for many homeowners to avoid foreclosure proceedings. The process involves negotiation on a loan in which the lender and borrower agree to adjustments on the original mortgage terms. The outcome of this form of negotiation can include lowered monthly payments, a reduced interest rate and even a lowered principal loan amount. The loan adjustments may be temporary or permanent, depending on the individual homeowner situation.

Credit damage will invariably turn up as a question for many homeowners seeking to prevent foreclosure. The following answers questions about whether a loan modification may affect your credit profile and what you can do about it.

Loan Modification, Credit Damage and Delinquent Payments

Credit damage is not the direct outcome from this form of loss mitigation negotiation. In fact, credit damage is usually the consequence of delinquent loan payments or failing to honor the original loan terms. Many homeowners already have negative marks on their credit profiles due to late and missed payments.

Loan Modification, Credit Damage and Principal Reduction

In some cases, loss mitigation negotiation may include a reduction in the principal amount due on the mortgage. Depending on the financial institution, some lenders may report the lowered loan amount as “paid less than full balance,” or something to that effect. While an unfavorable report, negotiation on a loan that leads to a principal reduction can often signal to future lenders the commitment to resolving a tough financial situation and taking steps to repair credit, especially when delinquent loan payments are already a factor.

Prevent Credit Damage With Professional Loss Mitigation Negotiation

In order to get the best outcome, loss mitigation negotiation should be carried by qualified loan modification companies. Reputable loan modification companies can successfully pilot the entire loan negotiation process, including the manner in which your lender reports the agreement to the major credit bureaus. A qualified loss mitigation specialist can bring a loan modification to terms on your behalf and negotiate to protect your credit profile.

Preventing foreclosure with loss mitigation negotiation is often the best way to avoid considerable damage to your credit rating. A professional firm can help protect your home, recover your mortgage situation and get you back on track.

Kevin Redmon covers loss mitigation negotiation articles for the website M3 Strategy, specializing in mortgages, loan modifications and short refinancing through their Finance Blog.

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Tags: Mortgage modification