My client's learned the hard way that it does. When we first started their home search, these clients had credit scores well over 750. They had an investment home and were on time on all their payments. With their income, they qualified just fine for a new loan for a primary residence even though they already had an investment property. In the process of making some offers for short sales and having those contracts fall through, they finally decided just to do a regular sale (that is about 6 months into this home search). We got the offer accepted. The home is beautiful. They were very excited. And then the loan officer pulled an updated credit report.
Their scores dropped about 180 points. Upon hearing this my heart sank. My client called me and told me, " I don't know what happened. We haven't made any big purchases, we haven't done anything other than a loan modification on the investment property." Come to find out, the loan modification was the reason their credit dropped. With the new scores, we could still get them into the house, but since their credit is reporting "partial payments," lenders don't want to touch it. We have not giving up and their loan officer is working hard to make something happen, but what was supposed to be an easy home purchase has now turned sour.
I am not exactly sure how they got the loan modification approved but they did. They thought it would be a long shot. They were not in financial distress, but just thought it made financial sense to renegotiate the terms of the loan with the lender. They would be saving a few hundred dollars a month so if the lender agreed, why not? Unfortunately, they were misinformed. And although most loan modifications are done by individuals under financial distress, there is a large group of individuals who will try the loan modification as a way to negotiate with the bank an interest rate reduction. They see it as a refinance without the closing costs and without having to worry if the home will appraise. The truth is that it is not at all like a refinance. If you are in financial distress and the loan mod is the only way to go, then by all means go for it. However, if you are doing just fine and want to preserve your credit and/or buy a home anytime in the near future-DON'T DO IT.
Even though there are some ways to do the loan modification can be done with a limited impact on your credit, you really need to do your homework and negotiate how it is reported as part of the loan modification process. In my view, the potential risks are just too great.