If you're struggling to make your mortgage payments each month, you might find financial relief in a mortgage modification. Under a modification -- including ones initiated through the federal government's Home Affordable Modification Program, better known as HAMP -- your lender agrees to change your loan so that your monthly payment shrinks. Lenders can do this by reducing your interest rate, forgiving a portion of your principal or reworking your loan's terms. The good news is that a mortgage modification shouldn't lower your three-digit credit score. But the financial struggles that led you to seek a modification might have already caused that score to fall.
Credit scores are a big deal today. Lenders of all types -- including those passing out mortgage, car or personal loans -- use them to determine if you're a risky or safe borrower. If you have a history of paying your bills on time, your credit score will be strong. If you routinely miss payments or are overwhelmed with credit-card debt, your score will suffer. When your score is low, lenders will either charge you higher interest rates or reject your loan applications. Today, most lenders consider a credit score of 740 or higher on the FICO scale to be a good one.
In the past, mortgage modifications would hurt your credit score. That's because lenders reported modifications to the three national credit bureaus - Experian, TransUnion and Equifax -- with the code "AC." That code, though, has historically been used for borrowers who only make partial payments, something that will trigger a dip in consumers' credit scores. An "AC" code could drop borrowers' scores by 30 to 100 points. This has now changed. Lenders now use the code "CN" to signify that borrowers have had their loans modified. The "CN" code does not trigger any negative changes to borrowers' credit scores.
Missed mortgage payments, though, will trigger a drop in your credit scores. And often, homeowners do miss several mortgage payments before qualifying for a loan modification. That's because borrowers who need to modify their loans are enduring financial hardships. Sometimes these hardships are severe enough to leave them with no money to pay their mortgage bills each month. Lenders will report missed payments to the credit bureaus.
Sometimes a lack of communication between a mortgage lender's modification and foreclosure departments can lead to a drop in your credit score. Many mortgage lenders tell borrowers who are seeking modifications to intentionally skip their mortgage payments. This is a way for these homeowners to prove that they can no longer afford these payments. Unfortunately, modification and foreclosure departments don't always work closely together. In such cases, missing a payment might also trigger the lender's foreclosure department to report a missed-payment notice to the credit bureaus, immediately dropping a borrower's credit score.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.