Borrower beware: A mortgage modification will crush your credit score


President Obama's Making Home Affordable mortgage modification plan is getting quite a bit of press lately, most of it focusing on how it can help borrowers who are having trouble with their payments.

But here's one downside to having your mortgage modified: Even if you haven't missed a payment or defaulted, lenders will report the modification to the credit bureaus and the result can be a sharply reduced FICO score. That can lead to higher interest rates on credit cards and reduced credit limits.

For most borrowers though, the benefits of the loan modification will save them enough money that the temporary FICO score beat down is a worthwhile trade-off. But the concern here is that no one -- not the government and not the banks -- is stepping up to make sure that consumers are aware of the credit score ramifications of a mortgage modification.