A a “loan modification” is actually debt settlement. Negotiating a lower interest rate or reduced payment may cause your account being reported as either “settled” or “paid for less than originally agreed.” Overall, changes in your credit history, alterations to your loan balance and a shift in your mortgage terms, can at the very least affect your credit score.
Mortgage servicers use special codes to alert the three credit bureaus what customers are borrowing and whether they’re making payments on time. The code lenders are using to report this is called AC, to alert creditors that borrowers were participating in the government program which lets them know you are in distress. The AC code signals that a consumer has made only a partial payment and this could make your scores fall from 30 to 100 points. Of course, if you have missed payments, the drop in your credit score can be much more than 100 points.
Here are some recent quotes from FICO:
Depending upon what else is in your credit history, this partial payment status "can lower somebody's FICO score by over 50 points," said Craig Watts, spokesman for FICO.
The "partial payment" status can stay on your credit report for seven years, says John Ulzheimer, president of educational services at Credit.com. "You have to make a decision, because modifying your loan is going to hit your credit," he said. FICO scores are the most widely used credit scores. Lenders do use a variety of other credit scores and each one may react differently to a loan modification.
Mortgage assistance programs such as the U.S. government sponsored Home Affordable Modification Program (HAMP) are supposed to allow a homeowner to get their loan payments reduced while at the same time maintaining that they have remained current. However, many homeowners who have gone through this program have reported negative hits to their credit scores. Some of these people were able to get them fixed, but only after complaining and fighting their mortgage servicer to follow HAMP credit guidelines.
link:
http://www.loansafe.org/loan-modification-affect-your-credit-score