More and more home owners facing difficulty with their monthly mortgage payments are seeking loan modification in an effort to fend of foreclosure. What they fail to realize is that even though they succeed in avoiding foreclosure, their credit score takes a very heavy hit.

Every time a borrower misses a payment, the bank reports this to the credit reporting agencies and the borrower’s credit score goes down. Also, when home owners apply for loan modification, the banks representatives themselves frequently advise them they must stop making mortgage payments before applying. This is because if they haven’t missed some payments, how will the bank know they are in trouble?

Because of lack of co-ordination between the loan mitigation and foreclosure departments, even such intentional stoppages get reported to the credit reporting agencies. As a result the borrower’s credit score suffers an unnecessary hit. And this happens not once, but every time a new payment is missed! Further more. This continues until the loan is cleared.

Now consider a case where the two departments do co-ordinate with each other to ensure that the intentional stoppages are not reported. And further, where the borrower has successfully re-negotiated the loan modification. Both parties are satisfied as a troublesome and rapidly spiraling out of control debt situation has been happily resolved. The borrower has manageable monthly payments and the lender is relieved he can recover most of his loan.

Yet even this will not save the borrower’s credit score from damage. It will continue taking a monthly hit because he is not making the monthly mortgage payments as per the original contract; which therefore stands breached every month!

So even though Loan Modification helps avoid legal action like foreclosure or bankruptcy, it does considerable damages to your credit score. Since your payment history is about 35 percent of your credit score this could really devastate your credit rating.
 
There is Hope

Don’t dismiss loan modification solely because of this, especially if you know you won’t be able to make your current payments. Credit score damaged because of loan modification can be improved, but only if you get professional help. The basic strategy is to challenge entries which are false, and get them removed.
The negative entries how ever can’t be erased. The only other thing which is workable sometimes is to try and get as many positive entries on to the credit report as possible. This is achieved by posting positive entries like on-time payments on your credit report.

But for this your lender has to work through a company with expertise in rapid re-scoring. It is neither cheap or easy. It could cost you from $150 to $1500.The exact amount would depend on the number of items needing fixing.