When you finance a home with a mortgage, you’re obligated to make payments on that mortgage on a regular basis, usually on the first of each month. If you run into financial difficulties, though, you may be worried about keeping up with your payments.
While you have a short mortgage grace period to catch up, missing that window could lead to late fees and ultimately foreclosure. The bank won’t foreclose on your property overnight, but it can typically initiate legal proceedings after four months of missed payments.
Fortunately, there are options for avoiding foreclosure, including loan modification and forbearance. Read on for a closer look at the consequences of late mortgage payments, along with steps you can take to stay up-to-date on your home loan.
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When Is Your Mortgage Due Date?
Mortgage payments are usually due on the first of each month. To find your payment due date, track down the promissory note you signed at closing agreeing to repay your home loan. Your promissory note will specify what date your payments are due. If you’re not sure where to find your paperwork, contact your mortgage servicer for assistance.
What Is the Mortgage Grace Period?
The mortgage grace period gives you some time to make your payment after the due date without penalty. It usually lasts for 15 days after your payment is due. If your payment is due on the 1st of the month, for instance, your grace period may span the 2nd through the 16th.
“This temporary leniency helps homeowners stay on track with their payments despite unforeseen events,” says Michael G. Branson, CEO of All Reverse Mortgage Inc., who has 45 years of experience in the mortgage banking industry.
As long as you make your mortgage payment during your grace period, your servicer won’t charge a late fee. Your servicer also won’t report a late payment to the credit bureaus during this period.
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What Happens When You Make Late Mortgage Payments?
While your mortgage payment is technically late after one day, you usually have a grace period of 15 days to make it up without penalty. Here’s what happens after your grace period ends. Keep in mind that this process can vary depending on your state and other factors.
15 Days Late
After your mortgage payment grace period expires, your mortgage servicer will charge a late fee for missed payment. This late fee may amount to 5% of the principal and interest amount due. If your mortgage payment is $1,500, for example, you’d owe a late penalty of $75. The servicer will continue to tack on this fee for each month you don’t make payments.
30 Days Late
Once a month has passed without payment, your servicer will likely report the late mortgage payments to the credit bureaus. Late payments can drag down your credit score and be a red flag to future lenders.
After 36 days, your mortgage servicer is required to attempt to contact you. It’s important to communicate with your servicer, since it may be able to work out an arrangement that could help.
45 Days Late
At this point, your servicer will send you a written notice of delinquency, including information about how much you owe.
90 Days Late
Your mortgage servicer will continue to charge late fees and report late payments to the credit bureaus. Your lender will also send you a demand letter, informing you that if you don’t make payments on your mortgage, the bank may start the foreclosure process on your home.
120 Days Late
Unless you’ve made other arrangements, such as mortgage modification, the servicer can typically start legal foreclosure proceedings once you are 120 days behind on payments. You could be responsible for paying attorney fees for your lender. You still have time to save your house, though — in fact, depending on your state, it may be possible to get your home back for some amount of time after the foreclosure sale.
Do Late Mortgage Payments Hurt Your Credit Score?
Your payment history makes up a big part of your credit score (35% of your FICO score and 40% of your VantageScore 3.0). Late mortgage payments can hurt your score for up to seven years, though the effect lessens over time.
“Each late payment can cause your credit score to drop by as much as 100 points or more,” Branson says.
Consumers with excellent credit will usually see the largest drop in their score. Damaged credit can stick you with high interest rates or unfavorable loan terms in the future, or make it difficult to qualify for loans at all.
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How Can You Avoid Late Mortgage Payments?
While the consequences of late mortgage payments can be severe, you have options for getting back on track.
“Call your mortgage servicer ASAP if you anticipate and have financial distress,” says Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association. “Do not ignore the problem. There could be better options the earlier a borrower calls their mortgage servicer.”
Here are some ways you can confront the situation head-on and avoid getting slammed with late fees, damaged credit or foreclosure on your home.
Housing Counseling
Head to the Department of Housing and Urban Development’s website to find an approved counselor who can discuss options with you. Foreclosure prevention counseling and homeless counseling are available at no cost.
Mortgage Forbearance
If you’ve run into financial hardship, your mortgage servicer may grant you a temporary forbearance. Forbearance lets you postpone or reduce your mortgage payments for a certain period of time.
“Many lenders offer options such as forbearance and repayment plans that can help reduce the burden of mortgage payments while you recover from financial hardship,” Branson says.
Keep in mind, though, that you’ll eventually have to pay back your missed payments as well as the interest that accrued during the forbearance period.
Loan Modification
To help you avoid missing payments, your servicer may be willing to adjust the terms of your loan and reduce your monthly payments. For instance, it may lower your interest rate or add years to your repayment term to make your monthly payments more affordable.
Mortgages that are backed by Freddie Mae or Freddie Mac may be eligible for Flex Modification, which can reduce your interest rate, extend your repayment term and lower your monthly mortgage payments.
House Sale
If worse comes to worst, you may consider selling your home if you can no longer pay back your mortgage, even with a forbearance or modification. While this is a last resort, it could make sense if your mortgage is unaffordable. Keep in mind that selling your home can come with various expenses, including real estate agent commissions, home staging costs and closing costs.
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What Late Mortgage Payments Mean for You originally appeared on usnews.com
