How Can a Trial Loan Modification Affect Your Credit Score?

Published on Mar 02, 2015 11:24 am

Most Americans spend roughly 30 percent or more of their take-home pay on their mortgage payment, leaving many homeowners trying to avoid foreclosure and credit damage. However, it´s important to understand that a mortgage modification has its share of risks, too. Before you assume your credit is free and clear of taking a hit, discover how a trial loan modification may affect your credit score.

What is a Loan Modification?
Also known as a mortgage modification, a loan modification happens when your lender agrees to alter the terms of your existing home loan with the goal of lowering your monthly payment. Whether your lender decides to extend the length of your loan, reduce your interest rate or modify how much you owe varies from bank to bank and from borrower to borrower. However, a change to your mortgage loan doesn’t necessarily happen overnight as your lender may want you to enter a trial modification period first.

Understanding a Trial Modification Period
While the bank goes through your paperwork to decide whether or not to grant your request to modify your home loan, they may decide to ask you to enter trial period. Similar to a probationary period, this gives you a chance to prove to lenders that you can handle the new financial commitment. It also gives the bank time to collect and verify the income and hardship documentation they often need to approve a modification.

Discover Potential Credit Issues
The secret is to check with your lender before applying for a mortgage modification to find out how your payment history will be listed. They may agree to report your trial modification period payments as “paid as agreed” to lessen the blow to your credit score.

Since a trial loan modification can affect your credit score, it´s important to understand the risks to your credit report. In some cases, your loan modification may not be permanently approved, leaving you with a battered credit score and a hefty mortgage bill. While several options for lowering your overall debt might seem to improve your financial situation now, it might not be the best solution in the long term. Sit down with a mortgage professional about your options before deciding whether or not the risks of a trial mortgage modification is worth the risk.

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