A loan modification is a reduction of your payment by your lender. This new payment is supposed to be affordable for the homeowner and in exhange for this lower payment your bank is now saved the cost and hassle of a foreclosure sale of your home.
The payment is reduced to 31 percent of the home owner’s income to loan ratio, and so the program is therefore only really of any use to those home owners who have home loan payments that exceed 31 percent of their monthly income.
The goal of a home loan modification is to help home owners who find themselves unable to meet current home loan payment obligations by renegotiating interest rates, financing rates, deferred payments or to exit the obligation to avoid foreclosure.
What is the point of a home loan modification?
If protecting your credit score is a factor in your decision to make a home loan modification, then home owners who are delinquent on their home loan payments should note that they have already experienced an impact on their credit score, however this impact is significantly lower than the impact that a foreclosure will have. Working with a home loan modification lawyer can help home owners to maintain their property and prevent their credit score from taking any additional hits.
The specific effect of a loan modification on your credit score depends on how the bank reports the modification to the credit bureau. It is possible and advisable to request that the bank report the change to the loan as a loan adjustment, showing on your credit report as a new loan with a lower payment and no increase in the debt structure. Reporting that the modified payment agreement is current will also help to protect your credit rating during the ‘trial modification’ phase of the home loan modification.