In a word, yes: most loan modification agreements will have a negative impact on your credit scores. Though this issue is being hotly debated and there appears to be a consumer advocacy movement against this, the fact of the matter is that if your lender notifies the credit bureaus of a loan modification agreement, it will be counted as a negative item on your credit report and will lower your credit scores. All three of the major credit reporting agencies – Equifax, Experian, and TransUnion – are reporting loan modification agreements as “partial payment plans” which negatively affect your credit.

The industry argument is that loan modification almost always results in the lender accepting a less profitable arrangement than the original one agreed to, regardless of whether or not any of the principal forgiven or the interest rates is reduced. Further, the credit reporting agencies accurately point out that most lenders do not accept loan modification agreements unless the borrower is already facing extreme difficulty meeting the terms of the original agreement. This, in turn, means that anyone that the lenders are willing to offer loan modification to really is a significant credit risk. While these arguments are sympathetic, they are rational and make sense, which means it seems unlikely that this reporting procedure will come to an end.

The consumer advocacy argument against this reporting procedure stems from the fact that in most loan modification agreements, neither the principal nor the interest is lowered, so every penny owed remains due. They equate mortgage loan modification to a lenders that temporary defer full repayment of other types of loans due to some extraordinary circumstance, a measure that usually does not have a negative impact on the borrower’s credit score. The underlying rationale is sound which has led to heated debate and discussion in some of the financial media like Bloomberg and Credit.com.

Further, the negative reporting is even worse if the borrower qualifies, and applies, for loan modification under the government sponsored Making Home Affordable (MHA) program. One of the stipulations of the MHA program is that the borrower has to make three timely trial payments before the loan is officially modified. These trial payments are at a lower rate than the terms of the standing loan terms, which means that throughout this period the borrower carries a rolling delinquency until the loan is officially modified. This is reported on the borrower’s credit report as a three month delinquency and can have severe consequences to the borrower’s credit score. Then, once the loan is officially modified, this too is reported to the credit bureaus as the “partial payment plan” described above, further lowering the credit scores.

The one way to avoid this is if the borrower specifically asks the lender not to report the loan modification to the credit bureaus and the lender willingly agrees. If the borrower has a good relationship with the lender and lender wants to keep their business despite the loan modification, the lender may agree to this, though they are not required to do so. After all, there is no harm in asking for this favor regardless as the default will be the negative reporting.

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Generally speaking, there are no specific qualifications that have to be met in order to negotiate a modification to a mortgage loan. Loan modification is an open process of negotiation between the borrower and the lender and either party has the right to accept or reject proposed modifications for any reason. In the current economic climate it is usually in the lender’s interest to negotiate a loan modification as opposed to foreclosing, so the only real qualifying factor in play is that most lenders expect borrowers to document that they are undergoing financial hardship and can no longer meet the original terms of the loan. If this is the case, most lenders will be willing to negotiate with the borrower in order to keep the original loan solvent.

One very large exception to this rule is if the borrower is seeking loan modification through the government sponsored Making Home Affordable initiative. The Making Home Affordable program (makinghomeaffordable.gov) is administrated by the Department of Housing and Urban Development on the consumer side and offers borrowers both refinancing and loan modification options. The loan modification option, like most government programs, is carefully structured and borrowers have to qualify to use it.

There are five conditions that have to be met in order to take advantage of loan modification under the Making Home Affordable program: (a) the home in question has to be the borrower’s legal primary residence; (b) the amount owed on the primary (first) mortgage has to be less than $729,750; (c) the borrower has to be able to show and substantiate financial hardship that is making keeping up with the original terms of the loan difficult; (d) the current mortgage had to have been obtained prior to January 1, 2009; and (e) the monthly mortgage payments has to be in excess of thirty-one percent of the borrowers gross (not net) monthly income. Failure to meet any of these conditions excludes the borrower form loan modification through this program.

Even if the borrower qualifies for loan modification under this program it still does not necessarily mean that he or she will receive a loan modification agreement. The lender is not obligated to grant the loan modification even to qualifying borrowers, though the government provides a number of incentives to persuade mortgage lenders to do so. More often than not, the mortgage lender will grant loan modification under this program in order to receive the incentives from the government; however if the borrower and lender already have a hostile relationship, the lender does not have to agree or grant the borrower any relief whatsoever. This is a big part of the reason that it is usually in the borrower’s best interest to maintain a good relationship with the lender regardless of the hardships being faced. When it comes to loan modification, either normal modification or through the Making Home Affordable program, maintaining a cordial relationship usually pays off.

Other than the Making Home Affordable exception, there are no uniform terms or conditions to qualify for loan modification, though many lenders may have their own “in house” qualifications that have to be met.

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Working out the terms of a modification of a mortgage loan is more or less an improvised process of negotiation between the borrower and the lender and the end result can take many different forms depending on the specifics of the case. As such, the process does not necessarily have to cost the borrower anything, though some forms of modification do result in additional expenses like loan forbearance.  However, if the modification takes the form of stretching out the amortization schedule, lowering the amount of the principal or interest, or waiving fees and penalties it is entirely possible to successfully modify a loan without any additional expense being charged.

The problem is that most loan modification negotiations can be complicated and time consuming and many borrowers have neither the knowledge nor the time to devote an appropriate amount of attention to the process. This is where third party negotiators come into play. These are companies that specialize in loan modification and understand all of the tricky nuances and loopholes in such negotiation processes. These experts sell their expertise to people seeking to modify their mortgage loans. In that the loan modification business is unregulated, the range of services provided and the related costs vary widely; however as is usually the case, you get what you pay for.

Most companies offer loan modification services come in three general categories: low-end, mid-range, and high-end companies. The low-end companies are usually the cheapest and offer the most limited services. Basically, they will give an initial consultation as well as recommendations on what sort of loan modification are more likely given the situation. They will show the client how to track down the right people to talk to and provide basic pointers on how to about the negotiation. However, once their consultation and advice is provided, that is the end of the service and it remains up to the borrower to actually do all of the work. These services usually do not provide any follow-up consultation or assistance and usually do not include any sort of money back guarantee based on the result of the negotiation.

The mid-range companies provide the same basic services as the low-end firms, but also provide continuous back-up and support. The borrower still has to do all of the work, but the company remains on hand to help guide the process and help resolve any issues that might come up as the negotiations proceed. These companies usually charge somewhere in the range of $1200 to $2500, but also offer limited money back guarantees and can usually be counted on to provide good service for the money. These companies can be especially helpful at reviewing the documentation and helping borrowers avoid hidden pitfalls in the new loan agreement.

The high-end companies usually retain full time professional negotiators and/or attorneys and will usually do all of the work, including the face to face negotiation with the lender. Most of these companies offer full satisfaction guarantees and will usually get the best possible modification under the specific circumstances. However, the borrower can expect to pay handsomely for these high-end companies, with prices often ranging from $2,500 to as much as $8,000.

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