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Does a loan modification negatively affect your credit score?

Your FICO® Scores can impact your loan interest rates, terms, approvals and more.
New Member

Does a loan modification negatively affect your credit score?

  Does a loan modification affect your credit score in a negative way?

                I have a loan with Wells Fargo on which I owe $150K (7.125% fixed 30yr.).  The home is now worth $125K so I am unable to refinance due to the high LTV ratio.  I have never been late on a payment and have no financial hardships (as of now).  I’m trying to save myself some money with a lower interest rate, in turn lowering my monthly payments.  Wells Fargo has offered me a 3 month trial loan modification period, during this time I will make a lesser monthly payment ($900 instead of $1,250).  The loan will be adjusted if the trial period is a success.

                Is this something that will negatively affect my credit score during either the trial or modification approval?

-jjhug

Message 1 of 6
5 REPLIES 5
Moderator Emeritus

Re: Does a loan modification negatively affect your credit score?

The short answer is it could.  If WF reports you as "paying on a partial or modified payment plan", then this will negatively affect your credit scores.

 

If this is a modification plan through a US government program, AND your modification is finalized (i.e. no longer a trial modification), then the reporting should change to "loan modified under a federal government plan".  This current does not have a negative effect on credit scores.

 

Loan modifications do not inevitably lead to drops in credit scores.  It depends on how it is being reported.

Message 2 of 6
New Member

Re: Does a loan modification negatively affect your credit score?

  I talked to WF and they informed me that during the 3 month trial nothing will be reported to the credit agencies, it will be kept internal.  However, after the trial if I'm approved and agree to the new terms the loan will be reported as modified and it will NOT be via a government plan....

 

  Will this form of reporting negatively affect my credit?  If so by how much and for how long?  Kind of at a loss of what to do.......

Message 3 of 6
Moderator Emeritus

Re: Does a loan modification negatively affect your credit score?

Okay, so you've gotten what sounds like pretty concrete information from your lender.  That's unusual.

 

During the trial period your score should be unaffected, so long as they continue to report you as "paying as agreed".  However, if your modification gets approved, you will be reported with comment code AC, "paying on a partial or modified payment plan".  This will hurt your score, to the tune of as much as 100 points or more, depending on where your credit score are right now.  Higher scores tends to fall more than lower scores.

 

This is a difficult trade-off.  You stand to save thousands of dollars in interest over the lifetime of your loan if you go with the modification.  But with lower scores, and with the comment added to your mortgage entry, it will be difficult to obtain new credit in the future.  Credit limits on existing cards or lines of credit could be cut.  If you need to purchase a new auto, you may not get a favorable interest rate.

 

At this point, no one knows how long the comment code will have a negative effect on scores.  The reporting of this code was not required until less than a year ago, so it's too recent of change to know the long-term effects.

 

You have another option that you should strongly consider.  You can go with the government's Home Affordable Refinance program, which allows you to refinance your first mortgage for up to 125% of the home's value.  Your loan would qualify, if the assumptions in your original message are correct.  You would be responsible for closing costs, as with any refinance, but you might be able to snag an interest rate in the low 5% range.  This should not result in any negative reporting on your credit reports.  However, the last time the public had free access to the Consumer Data Industry Association's reporting guidelines was last summer, so they may have changed their rules in the interim.  But whereas there have been numerous stories about people with modifcations who experience hits to their credit, there have been no stories of people having problems with the refinances.

Message 4 of 6
Valued Member

Re: Does a loan modification negatively affect your credit score?

Wondering if anyone has an update to this thread from 2008.  I am wondering if "Loan modified under a federal government plan" still no NO negative effect on FICO?

@Lel wrote:

The short answer is it could.  If WF reports you as "paying on a partial or modified payment plan", then this will negatively affect your credit scores.

 

If this is a modification plan through a US government program, AND your modification is finalized (i.e. no longer a trial modification), then the reporting should change to "loan modified under a federal government plan".  This current does not have a negative effect on credit scores.

 

Loan modifications do not inevitably lead to drops in credit scores.  It depends on how it is being repo





Starting Score: 571 June 2013
Current Score: Equifax 747 | TU 754 | Experian 766 | AAoA 25 years | updated March 16, 2015
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Message 5 of 6
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Established Contributor

Re: Does a loan modification negatively affect your credit score?

I'm curious, how exactly does a loan modification work... how can you miraculously lower your payment, does the term get stretched out?

Message 6 of 6