The hidden costs of late mortgage payments

When you buy a house, you might assume it’ll be smooth sailing. But life throws curveballs every once in a while. If you’re experiencing financial hardship, the key is not to panic. Contact your loan servicer as soon as possible if you know you’re going to be late or have trouble making a mortgage payment. They may be able to help you work out alternative arrangements, such as a payment plan or refinance.

You want to avoid making a late payment because it can have a far-reaching impact beyond your mortgage. Before we get into these costs, let’s discuss how late mortgage payments work.

When is a mortgage payment considered late?

For borrowers of a traditional mortgage, your payment is due on the first of the month unless your mortgage note specifically states otherwise. However, industry standard holds that you have an extended period of time to make your payment without incurring a penalty; this is known as the grace period.

There are really three different dates you have to think about. There’s the payment due date, the day the grace period ends and the day you’re considered to be delinquent. This delinquency date is when a payment is officially considered “late” for the purposes of your credit. That happens when the payment is at least 30 days past due.

If you pay between your due date and the end of the grace period, it’s all good. If you pay after your grace period, but before 30 days, you might be charged a late fee, but there’s no credit impact. Once your payment is at least 30 days late, it’s reported as late to the credit bureaus. This will lower your credit score and potentially have an impact on future mortgage qualification.

What is the standard mortgage grace period?

A grace period occurs between the date your mortgage payment is due and the date you will incur a late fee.

The amount of time varies depending on the lender (and other factors). For most Rocket Mortgage^® clients, the mortgage payment grace period is 15 days (the 2nd of the month through the 16th). If you have a different mortgage servicer, you should check with them to verify the length of your grace period. It may be stated in your loan documentation as well.

Is It Bad To Pay Your Mortgage Within The Grace Period?

There’s nothing inherently wrong with paying during the grace period. However, you don’t want to make a habit of cutting it close. Whatever the date in your contract for the end of your grace period (10th, 16th, etc.), that’s the day your mortgage lender needs to have it in hand. If there’s a delay in the mail or banking system, you might end up with a penalty charge.

If your payment is received after your grace period, the consequences start to kick in. You’ll likely have a late charge (specified in your mortgage contract), one of several potential mortgage servicing fees.

Late payments can also harm your credit score, potentially affecting your ability to qualify for new loans or lines of credit. If you miss a certain number of monthly payments, you can be subject to foreclosure as well.

The best and easiest way to avoid a late payment penalty is to use auto pay on your mortgage. Depending on who your lender is, you might be able to do the following:

• Rocket Mortgage clients: If you’re a Rocket Mortgage client, you can quickly set up auto pay through your Rocket It’s free and guarantees your payment will be made on time, well before your grace period ends and you face any negative consequences.
• Other mortgage servicers: If you aren’t a Rocket Mortgage client, your mortgage servicer may offer a similar payment option, so be sure to check with them so you’re aware.

How are mortgage late fees calculated?

The late fee amount depends on what type of loan you have. In some cases, the amount charged for late payments is also limited by state law.

On most types of loans, the late charge is only applied to principal and interest. Let’s say you have a $1,000 monthly mortgage payment based on principal and interest. If the late charge is 5%, you’re out an additional $50.

Late fee charges can add up, so if you’re beginning to have trouble affording your payments or anticipating financial hardships in the future, contact your servicer immediately. The sooner you get in touch, the better. Waiting is only going to make things worse for you.

The impact late mortgage payments have on credit

If you don’t make a payment in the same month it’s due, you’re officially considered past due. The effect of a single delinquent house payment on your credit report varies. If you have a particularly high credit score and suddenly miss a payment, you can see a steeper drop than someone with a lower score and a few late payments.

In this table, you can see the impact one missed mortgage payment (30 days late) can make on your credit score, according to FICO^®.

Here’s some good news: FICO^® says one late payment is not a score killer. Your score considers late payments only as part of your overall payment history. If you’ve paid your bills in the past and continue to pay all your bills going forward, you should be able to make up the drop more quickly.

When does a late payment get reported?

Creditors can’t report a late payment as delinquent to the credit bureaus until it’s 30 days past the due date. However, you should know that any late payment will stay on your credit history for 7 years.

The credit hit gets worse the more you push the payment back. A payment that’s 90 days late is worse than one that’s 60 days late, which is worse than one that’s 30 days late, and so on. The biggest detriments to your credit are collection items such as bankruptcies, foreclosures and liens.

How will a drop in your credit score affect you?

While your payment history isn’t the only factor affecting your credit, it’s given the most weight – 35% of your overall score. So, what happens when your credit score drops?

The truth is, a drop in your credit score can impact several areas in your life, including the following:

• Purchasing a new home
• Refinancing your current home
• Obtaining a car loan
• Opening up new credit cards
• Applying for jobs

Completing any of these tasks can become more difficult when you have poor credit or a credit report that’s marked by late mortgage payments. It can even raise the cost of your insurance premiums. It’s crucial to make payments on time for your mortgage and other bills as much as possible.

How many payments can you miss before facing foreclosure?

The mortgage company is likely to wait until you’re at least 120 days behind before starting the process of foreclosure. No one wants to evict people from their home. Also, from a business perspective, foreclosure can be expensive. It’s a lengthy and costly process, with no winners. Avoiding foreclosure is always the best choice for everyone involved.

What should you do if you can’t make a mortgage payment?

If a life change causes you to temporarily have trouble making your mortgage payment, the most important thing is to contact your servicer immediately. You may be able to create a payment plan so that you won’t continue to fall behind.

Your servicer may have a program that can help temporarily suspend payments or modify your loan to adjust payments. Most of these programs impact your credit, but they can help avoid foreclosure.

These options allow you to find a solution that works with your budget. But keep in mind, even if you’re on a payment plan, your credit will continue to be impacted until your loan is current.

The bottom line

While one late mortgage payment isn’t likely to be detrimental to your credit score or send you into the foreclosure process, you should avoid getting into the habit of making late payments if you want to stay away from long-term credit problems.

It’s important to get ahead of the problem by budgeting and ensuring you can afford the house you’re living in. If you’re struggling with your mortgage payment, refinancing may be a suitable option to help you get your payment back on track. If you want to get ahead of the problem and it makes sense for your situation, start the process for a refinance today.