Late Mortgage Payment? Here’s What You Need To Know.

Have you ever wondered what happens when you make a late mortgage payment? In most cases, you'll still be within the grace period and nothing will happen. It's when you go past the grace period that you need to worry. For most lenders, the grace period is approximately two weeks after the due date. This article will go into detail about what happens when you make a late payment or have a missed payment and how to avoid both.

The Grace Period

With most mortgage companies, you don't have to make your payment by the due date—usually the first of the month—because you have a grace period. Fifteen days is the most common grace period length. This gives you breathing room if you have to make the payment after the due date. If you make your payment during the grace period, you will not be subject to late fees, penalty payments, or negative reports to the credit bureau. You can look at your home loan documents to see how long your grace period is.

Consequences Of Very Late And Missed Mortgage Payments

Though the length of your grace period depends on your mortgage lender, the 15-day timeline is a good general rule. If your payment is more than 15 days late, you're out of the grace period and you'll have to pay a late fee. If you’re 30 days late, you can expect the mortgage company to report your late payment to the three major credit bureaus: TransUnion, Experian, and Equifax. This can negatively affect your credit score. 

By the 36th day of delinquency, mortgage servicers are required by federal law to contact borrowers by phone or in-person to talk about loss mitigation options such as loan modification, refinancing, and forbearance. The mortgage servicer must mail borrowers available loss mitigation options by the 45th day of delinquency. At 60 days late, you're hit with another late fee. At 90 days late, you’ll start getting foreclosure warnings. At 120 days late, foreclosure proceedings may start.

Your Credit Score

The first time you make a payment over 30 days late on a mortgage, your credit score (sometimes called a FICO score) could drop 50 to 100 points. It's easy to fall into a habit of making late mortgage payments because mortgage payments are most people’s largest monthly expense. Falling behind once makes it difficult to get back on track. The further you fall behind, the more difficult it is to catch up. Every time you pay over 30 days past the due date, it will show up on your credit report and each time, your FICO score will take a hit. Of course, you’ll take a worse hit if you pay over 60 days late.

Late Fees

If you pay your mortgage after your monthly grace period, your lender will charge a late fee. This makes it more and more difficult to get back on schedule with your monthly payment. The late fees are usually a percentage of your monthly payment. 

For example, say your monthly mortgage payment is $1,200 and there is a 5% late payment penalty. If you make a late payment, you'll be charged an additional $60. For most people, $60 isn't small change. These late fees make it more difficult to catch up the next month, which can lead to a habit of making late payments.

Efforts To Make Your Mortgage More Affordable

If you get behind on your payments, there are some built-in legal protections to help. Lenders are required to provide loss mitigation information to you at various points to help you to understand your options to get out of a downward spiral toward foreclosure. When you receive these notices, it's a good idea to contact a HUD-approved housing counselor. 

A housing counselor can tell you about loan modification and refinancing programs you might qualify for. These are available if you have a conventional mortgage backed by Freddie Mac or Fannie Mae. Loans backed by the Federal Housing Administration (FHA), Veterans Affairs (VA), and the USDA also have similar programs. If you qualify for refinancing, a housing counselor can help you find NMLS-licensed mortgage originators to help with the process. 

Many people have been struggling financially because of the COVID-19 pandemic. If this has created a short-term problem for you, you may want to discuss a forbearance with your counselor. There are special forbearance programs under the CARES Act.

If none of these loss mitigation efforts work for you and you fall behind on paying your mortgage for 90 days or more, you may receive an acceleration letter from the loan servicer. This letter will explain that your mortgage payments have been “accelerated” and your entire loan balance is due. The lender will give you 30 days to pay the full loan balance before they begin the foreclosure process. By federal law, a lender cannot begin the foreclosure process unless you are more than 120 days past due, in most cases.

Foreclosure Alternatives

By 90 days past due, you should already be considering foreclosure alternatives. If your home isn't worth as much as your mortgage balance, a short sale may be your best bet. A short sale is when you sell the house for less than the loan balance due. The bank must approve a short sale and will take the proceeds of the sale. In the best-case scenario, the bank will agree to take the proceeds in full satisfaction of your debt. 

Sometimes the bank will want a claim to part of the remainder of the debt, so it will reserve the right to sue you for a deficiency. If the bank wants to sue you for a deficiency for the complete amount of the unpaid balance, why would you want to enter into a short sale? You would only want to do this if you believe the short sale price will bring more than the price at a foreclosure sale and you're in a state that will allow the lender to sue you for the full deficiency.

Another alternative to foreclosure is a deed in lieu of foreclosure. This saves the lender from having to accept the upfront costs of foreclosure and saves you from having the lender pursue you for those additional costs. 

Bankruptcy

If you're in a state where the lender can sue you for a deficiency after foreclosure, your best bet may be a Chapter 7 bankruptcy. You should probably discuss this with a local attorney who is familiar with foreclosure laws in your area. A Chapter 7 bankruptcy will prevent your lender from being able to sue you for a deficiency after a foreclosure or short sale. If your case is a straightforward Chapter 7 bankruptcy, you may consider Upsolve's free bankruptcy tool that will allow you to file your own bankruptcy without an attorney. 

Your last option may be a Chapter 13 bankruptcy. This type of bankruptcy includes a payment plan that will allow you to catch up on your past-due mortgage payments.

The Foreclosure Process

If all else fails, your home will go into full foreclosure. There will be time between the notice of foreclosure and the actual sale. This time period and the notification process varies by state. During this period, the foreclosure sale's date and time are published in the legal notices section of the local newspaper. Lenders may also be required to give notice in other places based on your state's laws. Publishing this information alerts potential buyers of the sale in an attempt to make sure the real estate brings an acceptable price. 

After your home has been sold, you may still be living in the home. The next step is for the new owner to file an eviction proceeding in state court to take possession of the real estate. At this point, if state law and your mortgage documents allow, the lender may sue you for any deficiency. That means you’d be out of your home and be facing a lawsuit again. 

Avoiding Late Mortgage Payments

The best way to avoid making late payments is to make sure your payments are affordable. As mentioned above, a HUD-approved housing counselor can help you understand your options for making your mortgage more affordable. You could also consult with a local attorney. Mortgage modifications and mortgage refinances can make a huge difference in your monthly payments. 

The example below shows the effect of a Fannie Mae Flex Modification. This program can help you reduce your monthly mortgage payment by as much as 20% by decreasing your interest rate and extending the length of your loan. Also, your past-due amount can be added to your unpaid loan balance so you don't have to catch up on missed payments.

You can see from this example that your monthly payments would be much easier to make after the modification than before. The downside is that you’d pay more over the term of the mortgage due to accrued interest.

Another option is a mortgage refinance. Make sure you're dealing with an NMLS-licensed mortgage originator. Unlike a mortgage modification, a refinance is a new loan that's used to pay off the old loan. You’d do this to get a loan with more favorable terms. To qualify for refinancing, you’ll need a good credit history. The example below illustrates two positive benefits of refinancing a mortgage that had a 6% interest rate. By reducing the rate to 3.36%, both the monthly payment and the total amount to be paid on the 20-year mortgage would decrease.

Here, your refinance has led to a $143 (20%) reduction in your monthly mortgage payment. There’s also a $34,473 ($171,943 minus $137,470) reduction in the total amount that will be paid over the remainder of the loan period. That’s what a significant drop in your interest rate can do for you.

Modifications and refinances make permanent changes to your mortgage that help you to stay in your home. But what if you only have a short-term problem? For example, if you're going to be late this month because your car is no longer under warranty and you have a big repair bill, you can call your lender and let them know. Maybe they will let it slide without a late charge. It can't hurt to try.

Another short-term option is forbearance. If you're unemployed because of the coronavirus, a forbearance under the CARES Act is a good idea. This will allow you to reduce or skip your monthly mortgage payment until you get your finances back on track. 

Let’s Summarize…

It's important that you make your mortgage payments on time. If you must pay late, it's a good idea to stay in touch with your lender so they'll know what's going on. If you have a long-term problem that makes it impossible to make your mortgage payments, you should see if you can get mortgage relief to make your home more affordable. To learn more about the best mortgage relief options for you, it's best to contact a HUD Approved housing counselor and/or a local attorney.