How does loan modification affect your credit

In this situation, your home has lost value and the lender agrees to write down the principal and issue you a new loan. You're basically doing a short sale see below to yourself. This is typically a difficult arrangement to obtain, although in the current market environment, lenders may be more accommodating than in the past. Still, it's going to show up on your credit score as a debt writeoff for the next seven years.

A short sale, mentioned above, is when the lender allows you to sell the property for less than the balance owed on the mortgage in order to avoid foreclosure.

This is sometimes an attractive arrangement lenders, because the marked-down value of the property still exceeds what they could expect to get out of a foreclosure sale and is far less costly to process as well. Still, it goes on your credit score as debt writeoff, though the impact is considerably less than a foreclosure itself. A deed in lieu of foreclosure is when a homeowner who can no longer afford mortgage payments simply signs the property over to the lender. Opinions on this are mixed.

Some claim it's better for your credit than a straight-out foreclosure, because you're ending the foreclosure process early and reducing the number of missed payments that show up on your record. You need a principal reduction. You cannot reduce your mortgage principal with a refinance.

Some types of refinances for underwater loans require that you have at least six consecutive on-time payments to qualify. Get approved to refinance. See expert-recommended refinance options and customize them to fit your budget. Start My Application. Proof of income can include a salary agreement or contract from your employer that states your hourly rate or annual income.

Your most recent tax return: Your lender will likely need your entire tax return when you request a modification. Bank statements: Your lender might ask for bank statements to confirm your assets. A hardship statement: Your lender needs to know why you want a modification. Your hardship letter tells your lender why you can no longer make your monthly payments or pay for your entire loan balance.

You may also want to include supplementary documentation along with your letter to further illustrate your situation.

Things like medical bills or a termination letter from your previous employer can increase your chances of approval. You might want to refinance to: Lengthen your mortgage term. You lower your monthly mortgage payment when you refinance to a longer mortgage term. This can help you avoid foreclosure if your income is now lower than when you got your loan.

Shorten your term. You can also shorten your mortgage term with a refinance. Your monthly payment increases when you shorten your term. However, you own your home sooner and save money over time in interest. Take a lower interest rate.

A refinance can help you lock in a lower rate if interest rates are lower now than when you got your loan. Change your loan type. Take a cash-out refinance. All information, including rates and fees, are accurate as of the date of publication and are updated as provided by our partners. Some of the offers on this page may not be available through our website. Offer pros and cons are determined by our editorial team, based on independent research. The banks, lenders, and credit card companies are not responsible for any content posted on this site and do not endorse or guarantee any reviews.

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Here is a list of our partners and here's how we make money. But depending on the circumstances, you may be eligible for a loan modification, which can make it easier to stay on top of mortgage payments and avoid foreclosure.

A loan modification is different from refinancing your mortgage. Refinancing entails replacing your loan with a new mortgage, whereas a loan modification changes the terms of your existing loan. Getting a mortgage loan modification could mean extending the length of your term, lowering your interest rate or changing from an adjustable-rate mortgage to a fixed-rate loan.

Though the terms of your modification are up to the lender, the outcome is lower, more affordable monthly mortgage payments.