How will a late or skipped payment affect your mortgage?
Once you purchase a home, you get into the familiar habit of writing out a check for the mortgage each month. This can be a comforting ritual, as each payment to the lender gives you more ownership of the property. But there can be times when you dread the payment's approaching due date.
Perhaps it has been a tough month for your bank account and you need to wait until your next paycheck arrives in the middle of the month. Maybe you have suffered a job loss and are unable or unwilling to cut such a large check each month while seeking employment. It could be that the payment simply slipped your mind and you sent it out later than expected.
Thankfully, lenders are often forgiving if your payment comes in later than expected. And if your budget is strained enough that you are having trouble paying your mortgage, there are several options for relief available.
Mortgage payments are due on the first of the month, and homeowners are encouraged to have the check ready for this date. But lenders are typically more flexible about what they consider an on-time payment.
For example, a payment mailed out on the first of the month will likely not be considered late if it arrives a few days later. Kevin Graham, writing for the retail mortgage lender Quicken Loans, says lenders often extend this grace period through the first 15 days of the month. Your loan paperwork will stipulate the acceptable range for payments.
If your payment arrives outside the grace period, you'll have to expect a penalty. M.C. Postins, writing for SFGate, says the lender often charges a late fee of 5 to 10 percent of the principal and interest portion of the mortgage. You'll need to include this fee on the next mortgage check in order to stay current on your payments.
On the bright side, a late fee won't have any effect on your credit standing. The National Association of Realtors says that while lenders will report a missed payment to the credit bureaus, they'll stay mum on late payments.
Check with your lender to see what method they use to determine a late payment. Some may decide that a payment is on time if the postmark shows that it was sent within the grace period, but others will decide that it is late if it arrives outside this timeframe.
Missing a payment
There are more worrying consequences if you are late on your payment by more than 30 days. At this point, the lender considers that you have skipped a payment.
Some homeowners in a financial crunch have deliberately withheld mortgage payments to get a lender's attention. Marcie Geffner, writing for the financial site Bankrate, says this action is intended to convince the lender to modify their loan. However, the negative effects are sure to outweigh any benefits from a revised mortgage.
While a lender may be willing to work with you to make your monthly payments more affordable, you'll still have to pay the skipped payment along with any penalties. This added expense can put a greater burden on your budget in the upcoming months, increasing the risk that you'll be late on a payment or miss it entirely.
Graham says lenders will report a missed payment to the credit bureaus, which will lower your credit score. If you previously had a good credit record, a missed payment can knock your score down by 100 points or more. A single late payment can be quickly forgiven if you resume a schedule of on-time payments, but will stay on your credit record for seven years.
A reduction in credit score can affect you in many ways. Geffner says you'll have more trouble qualifying for a credit card, vehicle purchase, or mortgage refinance. You may also be required to make cash deposits before starting a utility, cable TV, or other service.
Depending on your contract, a late payment can establish more punitive conditions. The National Association of Realtors says some lenders may increase your interest rate or limit the line of credit you can take out against the home's equity.
A lender is unlikely to start foreclosure proceedings against you if you miss one payment. However, they will likely start this process if three months pass and they have not received any payments.
If you know you are going to be having trouble making your next mortgage payment, contacting the lender is often the best course of action. Elizabeth Weiss, writing for the real estate site Zillow, says informing the lender of your difficulties in writing is a good first step toward resolving the situation. Send this letter in advance instead of waiting until your payment is overdue.
You may be able to negotiate an agreement with the lender. If you expect that your financial troubles will be temporary, the Federal Trade Commission says you can offer to make up the late payment with penalties by a certain date. You might also work out a plan to add a missed payment in installments to your future checks.
Some buyers will qualify for forbearance, a modified payment schedule to help them through a temporary rough patch. In this situation, the lender will reduce or suspend the payments for a certain number of months. After that point, the buyer will have to resume regular payments and make up the missed contributions with a lump sum or regular additions to the mortgage check.
Lenders may agree to a loan modification for homeowners who are anticipating a longer financial hardship. The lender may give you more time to pay off the loan or lower your interest rate. They may also forgive some of your debt or even lower the amount of principal left on the property.
The National Association of Realtors says buyers may want to consider missing a payment on a separate bill instead of forgoing a mortgage payment. While this option will still hurt your credit score, the impact may not be as bad as a skipped mortgage payment.
You can also consider getting a home equity line of credit to reduce your debt in other areas, such as car payments or credit card bills. This strategy will make it easier for you to meet your monthly payments, although you may have to work to limit your spending to keep a stable budget.
If you are looking to move out of your home, you might consider selling it to move to a more affordable property. The Federal Trade Commission says you may have to settle for a short sale or deed in lieu of foreclosure; you won't see any profit in these transactions, but you won't be saddled with a mortgage debt you are unable to pay.
Declaring personal bankruptcy may allow you to set up a more affordable repayment plan or cancel your debt, but it should also be considered a last resort. This action can severely affect your credit score, and will remain on your record for 10 years.
Homeowners who are facing difficulty with their mortgage can also attend free or low cost counseling to help with their situation. This service is offered by the Department of Housing and Urban Development and nonprofit organizations such as the Homeownership Preservation Foundation.
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