Life throws everyone curveballs every once in a while. The key is not to panic when you get one. If you know you’re going to be late or have trouble making a mortgage payment, give your loan servicer a call. They may be able to help you work out alternative arrangements.
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 give you some good news.
If you have a traditional mortgage, your payment is generally due on the first of the month. However, there’s a pretty standard practice within the industry that you have until the last chance day on the 16th (or the first business day thereafter) to make your payment without incurring a penalty. This is referred to as the grace period.
Although the 16th is pretty common, you should check with your lender or servicer to see how long your grace period actually is. It may be stated in your loan documentation as well.
Hitting You in the Pocketbook
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.
The penalties for not paying your mortgage get worse as the month goes on, according to Quicken Loans Chief Economist Bob Walters.
“If clients don’t pay by the 16th, they incur a financial penalty,” Walters said, “but their credit isn’t yet affected. If they don’t pay by the end of the month, they will be reported to the credit bureaus and this is when a person’s credit becomes damaged.”
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 score of 640 and a few late payments, according to Equifax. Although each credit bureau has its own formula for calculating the scores, the drop may be as much as 90–110 points for an initial missed payment.
Here’s some good news: FICO says one late payment is not a score killer. Your score takes into account late payments only as part of your overall payment history. If you have paid your bills in the past and continue to pay all your bills going forward, you should be able to make up the drop eventually. However, you should know that any late payment will stay on your credit history for seven 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.
Although we’ve talked about your mortgage payment up to this point, it’s important to note that the effects are similar if you have something like a home equity line of credit.
Although 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 take a look at the practical impact.
When you have bad credit, it’s harder to get a mortgage. Even if you get one, you may still have to pay a higher rate. The same is true for car loans.
You may also have trouble opening up new credit cards as well. 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. You might be able to work out a payment plan so that you won’t continue to fall behind and to find a solution that works with your budget. Even if you are on a payment plan but don’t make the contractual payment within the month due, it will impact your credit.
Be sure to contact your servicer with any questions you have regarding your specific situation.
If so, subscribe now for tips on home, money, and life delivered straight to your inbox.