The Hidden Costs Of Late Mortgage Payments
Kevin Graham5-minute read
June 07, 2023
When you buy a house, you might assume it’ll be smooth sailing, but life throws curveballs every once in a while. The key is not to panic if you experience financial hardship. If you know you’re going to be late or have trouble making a mortgage payment, contact your loan servicer as soon as possible. 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 the real cost, let’s discuss how late mortgage payments work.
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When Is A Mortgage Payment Considered Late?
If you have 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.
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 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 have a negative impact on your credit score, potentially affecting your ability to qualify for new loans or lines of credit in the future. 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. Rocket Mortgage clients can quickly set up auto-pay through their Rocket Accounts. 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 may offer a similar payment option, so be sure to check with them if you aren’t a Rocket Mortgage client.
How Are Mortgage Late Fees Calculated?
The amount of the fee 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 are 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 are officially considered past due. The effect of a single late 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 of 640 and a few late payments, according to Experian®.
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. Creditors can’t report a late payment to the credit bureaus until 30 days past due. 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.
Other Effects On Your Credit Score
Although we’ve covered your mortgage payment up to this point in the article, it’s important to note that the effects are similar if you have something like a home equity line of credit.
Your payment history is far from the only factor affecting your credit; however, it’s given the most weight – 35% of your overall score.
So, what happens when your credit score drops? The short answer is that it impairs your access to credit. However, it might be more meaningful to look at the practical impact.
When you have bad credit, it’s harder to purchase a new home or refinance your current one. Even if you qualify for a mortgage, you may have to pay a higher interest rate. The same is true for car loans.
You may also have trouble opening up new credit cards. This includes the cards you can get from retail stores.
There are also effects outside access to credit and money. Employers will sometimes run your credit when you apply for jobs. It can affect your insurance premiums as well.
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 may help temporarily suspend payments or modifying your loan to adjust payments. Most of these programs are credit impacting 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.
How Many Payments Can I 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.
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’ll want to 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 actually 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. Get ahead of the problem and apply for a refinance today.
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