"In general, a refinance or loan modification will have a favorable impact on someone's credit score because the amount of their monthly debt obligation is often lower," Benaroya says. "The overall debt can be lower, too, if the lender has forgiven some of the principal on the mortgage. In addition, paying the new mortgage on time for six to 12 months helps begin the process of credit repair."
However, homeowners who make late or partial payments on their new loan modification or refinance will see these actions negatively affect their credit score. In addition, if the mortgage lender has forgiven some of the principal, this could be reported to the credit reporting agencies as "debt satisfied for less than the full amount," which could also negatively affect the borrower's credit score, says Ralph Roberts, a real estate author and host of the KeepMyHouse.com Web site.
Other factorsOther factors -- such as court judgments -- associated with mortgage solutions also can negatively affect a borrower's credit score.
"A court judgment posted to a person's credit report will almost always negatively impact her FICO score," Watts says.
For example, in some foreclosures and short sales, a lender may obtain a deficiency judgment against a homeowner. A deficiency judgment obtained by a creditor in court can be used to force borrowers to pay the difference between the amount of money collected in a short sale -- or a sale after a foreclosure -- and the outstanding balance of the mortgage.
Some people mistakenly think deficiency judgments do not apply to foreclosures. Foreclosure laws vary by state, but consumers should be aware of the possibility of a deficiency judgment at any time up to the statute of limitations after a foreclosure.
"People think they don't want to do a short sale because they may owe money later, but they need to understand that (a deficiency judgment) could be an issue with a foreclosure, too," says Olsen.
To avoid a deficiency judgment related to a short sale, borrowers should be careful to have a written agreement from the lender that says the sale represents a "total satisfaction of debt," Roberts says.