Loan Modifcation: Risks and Dangers

Loan modification simply means you are seeking a change in the terms you and the lender originally agreed upon. While consumers pursue this activity to save money and benefit financially, many times, a modification can have more risks than rewards.

Negative Credit Report

While seeking loan modification may be a short-term solution for your financial picture, the long-term consequences may outweigh the rewards. The issue occurs because lenders set the terms of your loan based on an anticipated profit off of your loan. When you modify your loan terms, you additionally modify the lender's profits. Lenders do not like taking a hit like this, and they report the difference on your credit report.

Your existing credit lines and history of payments are on your credit report. When you close a line, this also appears on the report. If you close it at the time it matures, it appears as a positive mark on your score. If you close or modify before that time, it appears as a negative mark against you. 

Fees and Penalties

Lenders build in fees and penalties for borrowers who modify their loan terms. Check your initial contract to see what fees were determined upfront on your loan. You likely signed on to agree to pay fees for any future modification, and these fees can outweigh the benefits you are seeking.

To assure you are making the right decision, do the math to determine what you will pay if you carry out the loan in full. Next, do the math to determine the total amount you will pay with the modification, plus fees and penalties. Take into account the negative mark on your credit, which does not have an actual fiscal value but is definitely a negative consequence. With these factors considered, decide which option is best. Sometimes, the financial savings of a modification outweigh the negative credit report and higher balances because it is the only option available to the homeowner to remain in the home.

Predatory Lending Practices

Many predatory lenders promise results with loan modifications, without telling you the whole story. Some predatory practices are requiring that a borrower pay upfront fees to modify their loan. If the agency is legitimate, it will not require any upfront fees, other than cost of credit report and other nominal fees.

Many lenders recommend that you work directly with them, instead of using the services of a modification company. Also, attorneys, or highly recommended agencies can help. Checking the agency's recommendations should keep you safe from identity theft and predatory lending practices.