Mortgage lending is a big business, but it’s also a risky business. Before a bank even thinks about approving an applicant for a loan, an underwriter looks at this person’s financial profile to ensure he has sufficient income and resources. The lender approves or rejects him based on his financial picture at the time of applying.
But even when an applicant is an ideal candidate for a mortgage, it only takes a job loss, an illness or a divorce to mess up his finances to the point where you have a late mortgage payment.
Effects of Late Mortgage Payment
Mortgage payments are due on the first of each month, but lenders typically give a grace period, which allows borrowers to pay their mortgage up to the 15th of the month without penalty. If a borrower pays his mortgage after the 15th, the lender charges a late fee. A late payment, however, isn’t report to the credit bureaus until the mortgage is 30 days past due.
Some people don’t understand the seriousness of a 30-day late payment, so they don’t realize how this single setback can affect their credit. Unfortunately, it doesn't matter how long you've had a mortgage, or whether you've paid on time in the past. Being 30 days past due on your mortgage will damage your credit score, and to make the matter worse, the delinquency remains on your credit file for up to seven years, although the effects of the late payment lessens with time.
The number of points you lose after a lender reports a late payment depends on your credit score before missing the payment, and the number of day you’re late with the payment. The sad part is that borrowers with the highest credit scores often lose the most points. So if you had a credit score of 720 prior to a late mortgage payment, your credit score could plummet as much as 90 to 100 points. But if you had a credit score of 650, your credit score might only drop 63 points.
Regardless of whether you lose a little or a lot of points, any drop in score affects your credit health. You can go from good credit to bad credit in less than a month. Once your credit score decreases, you no longer qualify for the best interest rates or the lowest insurance premiums. And depending on the nature of your work, a low credit score can affect your employment options.
But although a late mortgage payment has a tremendous impact, the good news is that you can recover and regain lost points. The rate of recovery varies by person, and it has everything to do with how fast you bounce back financially. If it’s a temporary setback and you’re able to resume timely payments, which means you only have one 30-day late payment on your credit report, you’ll recover faster than a borrower who’s 60 or 90 days past due on their mortgage.
Get Help for Payment Problems
None of us can predict our financial health one, two or three years in the future. So even if you’re responsible with your money today, your situation can change tomorrow. If this happens and you realize you can’t pay your mortgage, the importance of communication can’t be stressed enough. Speak with your lender before the problem gets out of control. The longer you stay silent, the more likely you’ll default and damage the relationship with your lender.
Some banks have a hardship department and offer provisions to assist borrowers who can’t pay their mortgage due to job loss, divorce, illnesses, etc. Immediately selling the property can avert a foreclosure. But if you’re unable to sell (maybe you’re underwater) other options include a short sale, a deed in lieu of foreclosure or a mortgage modification.
During a hardship, a deed in lieu of foreclosure involves voluntarily signing over the deed to the mortgage lender and walking away from the property. A short sale lets you sale the property for less than you owe, and a mortgage modification is when the lender modifies the terms of your loan without refinancing, which typically results in a lower interest rate and an affordable house payment.
Hardship provisions allow you to deal with payment problems head on, but in each case your credit pays the price. These options not only leave a black mark on your credit report, your credit score can fall 100 to 160 points. The upside is that these options are the lesser of two evils. Damage from a short sale, mortgage modification or deed in lieu of foreclosure isn’t usually as damaging as a foreclosure proceeding. In a foreclosure, your credit score can drop as much as 250 points.
A late mortgage payment doesn’t only result in a late fee; it can also tarnish your credit report and lower your FICO score. If you're concerned where your credit might be, make sure you check it out!