Late Fees, Credit Score, Refinancing; a Late Payment Affects It All
It's so important to set yourself up with a competitive mortgage. Being realistic about how much house you can afford helps ensure you can handle your monthly installments, so when it comes time to house hunt, be sure you have - and stick to - a set budget.
Trouble paying your mortgage? You're not alone.
Because unexpected life changes do happen, like the loss of income due to a global pandemic, it's natural that some people are late when it comes to paying their mortgage. But what happens when you're late with your payment during times in which there isn't any assistance available for homeowners?
Here, we break down the true cost of late mortgage payments.
Going to Be Late? Do This First
The second you realize you're going to be late on your mortgage payment, call your lender. They may have options for you to explore that you haven't thought of or may be willing to make alternative arrangements for you based on your special circumstances. You won't know unless you ask, and when it comes to your home, you want to have open lines of communication with your lender.
Utilize Your Mortgage Grace Period
It's vital that you understand all of the terms of your mortgage agreement, and that includes when payments are due and the terms of any grace periods.
Many mortgages have a grace period of 15 calendar days from the payment due date.
That means that if your payment is due on the first of the month, your lender would have to have the payment by the 16th. But don't assume that's the case for you! Review the terms of your contract so that you know when the grace period is, and if and when you'd start to incur late fees.
During hard times, it's perfectly acceptable to pay within the grace period. After all, that's what it's designed for. But making a habit of paying your mortgage within that window can add to your levels of stress and anxiety, so aim to cut back on other expenses and spending so that you can get back on track.
Any late fees that are associated with a missed mortgage payment will be outlined in your mortgage contract, so they shouldn't come as a surprise. Typically, mortgage late fees are 3%-6%.
But every lender is different. For that reason, it's important to understand all that is outlined in your mortgage contract before signing. The more payments you're late on, the harder it becomes to get back on track, as now you're tacking on extra costs.
You've worked so hard to protect your credit score so, naturally, you're wondering if one late mortgage payment will affect your credit. Yes, a missed mortgage payment can cause your credit score to drop. How much so? It varies.
The good news? FICO says that your credit score looks at your overall payment history, so if you typically pay all of your bills on time and have just one late payment, it won't cause your score to plummet. Plus, once you get back on track with your payments, you can build your score back up.
It's important to note that your lender can report your late payment to credit bureaus if more than 30 days have passed since the due date. If they do so, that late payment may be part of your credit history for up to seven years, so do everything you can to make the payment within the grace period.
The later the payment becomes, the bigger the hit your credit score takes. So while it's best to be on time for all payments, a payment that is 30 days late is better for your credit score than one that is 60 days late. For that reason, move money around whenever possible so that you can pay your mortgage installment as soon as possible.
Since late payments impact your credit score, that means it will become more difficult to refinance your home, should the time ever come. That's because the lower your credit score, the higher risk a lender determines you to be. Should you be able to refinance, it's likely that you'll be hit with high interest rates that are designed to protect the lender.
The truth about foreclosure is that no one wants to go through the process; not the lender and certainly not the homeowner.
Your mortgage contract will outline how many missed payments are needed to trigger the foreclosure process. Typically, it's no payment for at least 90 days, but can be after just one missed installment. Again, another reason why it is of the utmost importance to understand the terms of your mortgage contract well before you sign.
Remember: Your lender wants to work with you.
The foreclosure process can be an expensive one for the lender, so it's likely they'll be open to working out a payment plan with you. Don't wait until your mortgage is 30 or even 60 days late to have a conversation with your lender about the state of your finances. Many times an agreement can be worked out well before you get too far behind on payments.
Choose Your Mortgage Carefully
As you can see, it's vital that you opt for a mortgage that doesn't stretch you financially. While it's true that we can't always account for unexpected changes in income, a rainy day fund and dedicated savings can help considerably, should your circumstances change.
Before heading into the home buying process, make sure your debts are paid down, you have emergency money tucked away, and you understand the importance of comparison shopping. Pitting lenders against each other may result in a lower interest rate for you, which has the potential to save you thousands of dollars over the life of your mortgage.
Lendgo makes it easy to find lenders and compare offers, so don't hesitate to explore your home loan options via our free online platform when you're ready to become a homeowner!