Mortgage Grace Period: What It Means For You

Though your mortgage is tied to an exact monthly payment date, all mortgages provide some flexibility. Most mortgages are due on the 1st of the month. But you can usually make your home loan payment by the 15th of the month without incurring any fees, or being subjected to negative reporting on your credit history. This flexibility is called a grace period. Below, we explain grace periods in more detail and reflect on why they should matter to you. 

What Is A Grace Period For Mortgage Payments?

A grace period is the date range whereby borrowers can submit their monthly payment without it being considered late. Typically, grace periods extend for two weeks beyond your set due date. If you make your payment within that amount of time, it won't be considered late and you won't incur late payment fees or negative credit reporting. 

Is It Okay To Pay Your Mortgage During The Grace Period?

If you've missed your initial mortgage payment date, you can avoid late fees and any negative reporting on your credit by submitting the payment during the grace period. It’s important to remember that your payment usually needs to be both made and received before the grace period expires. Simply submitting a payment by mail is not sufficient. Your mortgage lender needs to receive it before the grace period expires too.

Since mail can be delayed, it might be best to submit any payment made after the due date in person at a bank branch or mortgage office, if you have that option. If you are submitting a payment during your grace period, you may also want to contact your mortgage company to let them know that you’re making the payment now and how you’re going about submitting it. This not only informs them of the delayed payment, it may be a chance to discuss your options if you’re struggling to make timely payments. 

What You Need To Know About Late Mortgage Payments

If your payment is not received within the grace period, any of the following consequences may occur: 

• Late fee. How much you’re charged for a late fee will depend on the terms of your mortgage. It may be a set fee or a percentage of your payment. These details should be written in the mortgage documents you signed and might be limited by state law. For example, in California late fees are limited to 6% of the payment amount and in New York they cannot exceed 2% (except some FHA loans, which permit 4%). 

• Credit Reporting. If your payment is not received within 30 days, your mortgage company may report your delinquency to the credit bureaus (Experian, Equifax, Transunion). The late payment will affect your credit score and stay on your credit report for up to 7 years. 

• Collection Activity. If you miss consecutive payments, your mortgage servicer may submit the amount due to collections. You'll then be repeatedly contacted by a collection agency seeking the missed payments, along with additional costs and late charges.

• Foreclosure. If you don't get your payments back on track, you'll be facing foreclosure. This occurs when the bank begins the legal process of taking ownership of your home. 

To avoid a small problem becoming a big one, you'll want to communicate with your mortgage company. If you're temporarily struggling to make payments, your lender is likely to help you get back on track. It’s unlikely that you’re navigating a problem that you won’t be able to resolve quickly unless you miss several consecutive payments or are chronically late when meeting your mortgage obligations.

Foreclosure 

Foreclosure occurs when your mortgage company attempts to take ownership of your real estate. When the mortgage holder loaned you the money to purchase your home, it reserved the right to take ownership if you failed to make payments. Whether it files action in the local courts for a judicial foreclosure or bypasses formal legal action in favor of a non-judicial foreclosure, your lender can take ownership or force an auction of your property if you don’t take action to prevent the completion of their foreclosure case. The details of this process will depend on your mortgage terms and local laws but this is a situation you definitely want to avoid, so it is important to stay ahead of this process if you are struggling to make payments.

Options If You Can’t Pay Your Mortgage Payment By The Due Date

If you're regularly unable to make mortgage payments by your due date, you may have options available to you. Some of the most common loss mitigation strategies favored by borrowers and lenders alike include: 

Applying For A Forbearance 

A forbearance is a temporary suspension or reduction of your payments obligations. It’s not a long-term solution but might buy you time to get back on track. Contact your mortgage servicer to learn about your options. 

State and federal law extended many forbearance programs as part of Covid relief legislation. Under the federal CARES Act federally backed loans (including FHA/HUD, Fannie Mae, Freddie Mac, USDA or VA loans) homeowners are entitled to a 6 month forbearance. The Consumer Financial Protection Bureau has provided some helpful information on applying for a forbearance on your federally backed mortgage. Note that these options won’t be available forever though.

Some states also passed similar laws extending forbearance options and private loan servicers may have similar programs. Check with your servicer to ensure that your taxes and insurance are still being paid during any forbearance, as these may be ordinarily paid as part of your overall monthly mortgage payments. 

Restructure Your Mortgage

You might consider trying to restructure your mortgage by negotiating with your mortgage loan servicer. They may be willing to modify the terms, possibly extending the repayment period which will lower your payments. You might also be able to change the monthly due date or submit bi-weekly payments. This process is often referred to as a loan modification. 

Refinance Your Mortgage

You might try to refinance your mortgage balance which involves getting a new loan to pay off the old one. This option may be particularly helpful if you can get a lower interest rate or you want to extend the payment term (e.g., switching from a 20 year mortgage to a 30 year). 

If you’re considering refinancing, you should be cautious. It might sound great to lower your monthly payment. But, by refinancing, you'll incur additional loan servicing fees and may end up paying more interest over the life of the loan. Sometimes, extending your payment term can mean paying tens or even hundreds of thousands more on your mortgage over time. Note also that this option is really only viable if you have good or excellent credit. Otherwise, a loan modification may serve your interests better. 

Taking Out A Home Equity Line Of Credit (HELOC)

A home equity line of credit involves taking a loan out on the equity you have in the home. Although you are repaying your mortgage, you still have an ownership interest in the home. This is called your equity. Your equity is based on how much you've repaid, how much you put down for the home, and how much the home value might have increased since you bought it. You may still owe a significant amount on your mortgage but you can often still get a loan using your equity as collateral. 

Homeowners often use these types of loans in order to better afford expensive improvements to their houses, but you also might use this opportunity to weather a temporary financial hardship. A small home equity line of credit can serve as a reasonable way to get caught up on unexpected expenses or a few missed mortgage payments. But it can be a risky approach, too.

Taking a second line of credit (in addition to your mortgage) on your home might quickly become too burdensome for your budget. Once you get a line of credit, you'll have to also make payments on this loan. This obligation will exist in addition to your mortgage payment obligation. If you're already struggling to make your mortgage payment, adding another monthly payment might add to your troubles, especially if the interest rate and terms are less favorable than those you’re already navigating. Sometimes, this option can be a helpful solution. But there are plenty of people looking to take advantage of distressed homeowners by offering home equity lines of credit and second mortgage loans that amount to little more than scams. Do your research before committing to this plan of action. 

Pay Your Mortgage And Other Secured Debts First

Your mortgage might be your most expensive bill but it's probably the one you should pay first. Paying credit cards and student loans is important to maintaining your credit score and attaining financial security but these debts are unsecured, while your mortgage is a type of secured debt. 

Secured debt is connected to property, like a mortgage or a car loan. If you don't make the payments on these items, the loan terms permit the lender to take the property back. For vehicles, this process is called repossession and with mortgages, it’s known as foreclosure. 

Unsecured debt is not connected to property. Failing to pay these debts can greatly impact your credit score or make it difficult to get future loans, but lenders have fewer options in pursuing these debts.

Let’s Summarize...

You don't have to worry too much if you can't submit your mortgage payment on its exact due date. Mortgage terms generally extend for a 15 day grace period. As long as you get your payment to your servicer within 15 days, this slight delay should not have any long-term effect on your credit or your mortgage. 

But, if making timely payments is becoming a problem, you might be subject to late fees or even foreclosure. When planning your payments, it is important to prioritize your secured debts, like your mortgage, since a lender may go after the asset (your home) if you fall too far behind. Before the problem grows, consider your options, such as a temporary forbearance, negotiating with your servicer, or refinancing your mortgage.