Loan Modification and the Credit Score
When homeowners apply for a loan modification they are often concerned about their credit score. Looking at it logically, since modification does not add debt to the individual then credit score should not decrease. In fact, since the debt may decrease the credit score might even increase and start to get better. Once the payments are being made on a consistent basis the credit of course will gradually increase on a regular basis.
This is however the best case scenario because sometimes logic doesn’t always pertain to these matters. A lot of the influence on the credit score relies on the lender and how they report the modification to the credit bureau. Many lenders will actually report the mortgage as being paid less than the amount that was owed so it has a negative influence on the credit. If the home in already started in the foreclosure process then the credit score will have already decreased. This being said, modification does have the least amount of negative influence on the credit score out of foreclosure, bankruptcy, and the short sale.
The credit score is not the only thing that a homeowner has to watch for, at least not directly. Any amounts that were forgiven from the mortgage have to be put on the taxes as it is taxable. The amount that will be owed in taxes is still much less than the original amount forgiven, but some individuals do not realize this and end up in trouble with the IRS which then has a negative effect on the credit score.
It is important to find out how the lender will report any modification to the government so that the borrower can react to it appropriately. While credit scores go down easily they are not so simple to bring back up so a person needs to know what to expect.
