A lot of homeowners considering loan modification want to know what kind of impact loan modification has on their credit. For instance, here’s a question we received here on KeepMyHouse.com just the other day:

Regarding the credit aspect of the loan modification. Will the loan show on your bureau that you have modified it? Will it show settled and a new one opened? Will there be signs to other future lendors that would indicate to them that your convential loan was modified and therefore give them a warning as to the financial hardship that occurred during this period of time. I realize the short term advantage is simply keeping your house, but I am concerned about the long term effects it may have on my family and our future abilities… ~ Ron

Great question, Ron! Here’s what you need to know:

No, the loan will not be stated as “modified” on your credit report. I suppose this classification may come in the future, but I’ve yet to see anything other than “settled.” This is all a pretty new adventure and there will be some items that will need to be worked out as time goes on. But if the account was current when the modification was done (i.e. modification was a preventative measure), then I don’t believe there will be any reporting to the bureau at all. What’s to report, you were current and you still are? Maybe there will be a change in the monthly payment amount, but like I said this is all so new I’ve not seen that yet either. For now, my advice would be; if you see a status reported on your credit report that you do not agree with or that is false, challenge it.

You’re right to be concerned about your long term financial health. Your credit score is certainly a part of that health. You’re also right when you say that the short term goal of keeping your house has to take preeminence. If you can fix the problem now, you live to solve the problem later. If you’ll indulge me in answering your question, I’d like to use the analogy of being in a boat out in a lake.

The boat springs a leak that threatens to sink it. You happen to have some duct tape (next to the dog, man’s second best friend) and manage to slow the leak down to the point where you’re able to get safely to shore. You didn’t solve the problem you just fixed it temporarily. If you don’t permanently seal the leak, you’re sure to sink the next time you venture out. The leak took your immediate attention because it was urgent and was capable of sinking the whole ship. The financial crisis you find yourself in right now also requires your immediate attention. Like the duct tape patch job, a loan modification might only be a short term fix. You have to assess the real problem in your financial hull and solve it.

My personal opinion regarding creditors future perceptions of these hardships is that when they look at credit reports a few years from now and see “blemishes” on people credit between the years of 2006 through 2011, their response will be one of: “Oh yeah, that was an horrible time.”

Your goal should be to make the negative reporting to your credit as short a span of time as you can. I also think that creditors will be more likely to take a chance on lending to someone who took measures to solve the problem than they will be with those who just threw in the towel and walked away. You certainly can not rely on credit forgiveness being reality, but if there’s not something done to address the issues created by these financial times, credit/lending will remain overly tight for years.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)