The Hidden Costs Of Late Mortgage Payments
Kevin Graham5-minute read
May 27, 2022
When you buy a house, you might assume it’ll be smooth sailing, but life throws everyone 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.
When Is A Mortgage Payment Considered Late?
If you have a traditional mortgage, your payment is generally due on the first of the month unless you have chosen a biweekly payment plan or are splitting up your expenses, which allows you to make payments on the 1st and 15th. 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 Payment Grace Period?
A grace period usually occurs between the end of a billing cycle and the date your fee is due.
The amount of time varies depending on the lender and other factors, but in most circumstances, a lender usually permits a borrower 15 days from the due date. So, if your mortgage payment is typically due on the 1st of the month, you’d have until the 16th to pay your missed mortgage payment without incurring a penalty. In some cases, the last day may fall on a weekend – payment would then be due the first business day thereafter.
Although the 16th is pretty common, you should check with your lender or servicer 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 that happens to fall on a holiday or if there’s a delay in the mail or banking system, you don’t want to end up with a late charge.
If you pay beyond the date in your grace period, the consequences start to kick in. When you pay your mortgage after the grace period, you’ll likely have a late charge specified in your mortgage contract, one of several potential mortgage servicing fees.
If you pay your mortgage outside of the month it's due, it has an impact on your credit score as well as potentially affecting your ability to qualify for new loans or lines of credit in the future. If you miss a certain number of payments, you can be subject to foreclosure as well.
How Are Mortgage Late Fees Calculated?
If you can’t make your payment by the end of your grace period, it’s officially considered late. In the short term, this means you’ll pay a late fee.
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 50 additional dollars.
Late fee charges can add up, so if you are beginning to have trouble affording your payments or anticipating financial hardships in the future, it might be worth refinancing your mortgage sooner rather than later.
The Impact Late Mortgage Payments Have On Credit
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, 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 to remember is to contact your lender or servicer. A lender might approve a loan modification, which is when they agree to lower or suspend payments, or they may even work out a payment plan so that you won’t continue to fall behind.
These options allow you to find a solution that works with your budget. 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 Foreclosure?
The mortgage company is more 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 if they don’t have to. Also, from a business perspective, foreclosure can be expensive.
Depending on the state, the legal proceedings can involve going to court. Even if that’s not the case, there’s often a trustee involved. That’s before any property inspections to make sure the home is in order. It can be even more costly if the property doesn’t sell at auction right away and the lender has to provide for maintenance, lawn care and snow removal.
The Bottom Line
If you’re struggling with your mortgage payment, refinancing may be a suitable option to help you get your payment back on track. Working with a lender or service provider can help you avoid foreclosure, but you must contact them. If you’re a Rocket Mortgage® client, you can get started online or call us at (800) 508-0944.
Be sure to contact your servicer with any questions you have regarding your specific situation.
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