Loan modification may not have an adverse effect on your credit, but missing out on your mortgage loan payments definitely will. You need to do everything you can to avoid foreclosure, because it will harm your credit record for a long time.
The effect of loan modifications on your credit rating will depend on what is negotiated and how the lender reports your situation to the credit bureaus.
Mortgage loan modification involves changing the terms of a mortgage loan to make the monthly payments more affordable. This can help house owners who are not being able to repay their loans to avoid foreclosure.
Loan modification may involve a lower interest rate, longer loan term, different type of mortgage loan, or all three.
If you are not being able to keep up with your home loan payments, you need to discuss your problems with your lender as soon as possible. Not replying to letters from your lender will make it more difficult for you to avoid foreclosure.
You ought to discuss modification of loan with your lender as soon as you find that you cannot keep up with the payments. You can do this even if you haven’t missed any payments.
If you are facing a temporary loss of income, you can seek a special forbearance. The lender will create a revised payment plan, which will involve temporarily reducing or suspending your monthly payments. However, you will have to make increased monthly payments when the payments resume.
Usually, the principal is not reduced in a voluntary loan modification, as is done in a bankruptcy. This increases the chance of another default for those who are ‘underwater’ or owe more on their mortgages than what their homes are worth. They will have no equity to fall back on if they face serious financial problems.
It is much easier to qualify for home loan modification if you have a steady income and your lender feels that you will be able to afford the lower monthly payments.
If you feel that you will not be able to keep up with the lower payments after a loan modification, or are too far underwater, you can consider making a short sale. This involves selling a home for an amount that is less than the loan balance. The mortgagee agrees to a reduced payoff and forgives the rest.
Seek the advice of a professional housing counselor, attorney, or trustworthy real estate professional. Weigh your options and decide on a course of action that will minimize damage to your credit file.