If you are like many home owners, there may come a time when you are tempted to miss a payment on your mortgage. You may feel like you have no choice, or you may be in a situation where you feel like you need to pay other bills before the mortgage.
Of course, everyone knows that the mortgage payment is important. But just how important is this particular payment? What happens when you miss a mortgage payment? How does it affect your credit score? Knowing the answer to these questions can help you make informed financial choices, and can help you avoid damaging your credit more than is necessary. We consulted with Bill Gassett, a top Real Estate agent in Ashland Massachusetts to get his take on the impact of missed payments. Bill explains how much damage a late payment can do to ones credit history. If you are going to be buying a home there can be substantial repercussions to not being fiscally responsible.
Late Mortgage Payments Can Have A Major Impact On Your Credit Score
Yes, missing a mortgage payment is a big deal – especially when it comes to your credit score. There are reasons for this, though. To understand why, you first have to understand how your credit score is calculated. The two biggest factors in how your score is calculated are the history of your payments, and the total amount of money that you owe lenders. Your payment history makes up 35% of your credit score, while the amount you owe makes up 30%.
If you are like the large majority of home owners, your mortgage is the biggest loan you have – by far. This means it makes up the lion's share of your debt. It is also probably the only loan you have that will last for such an extended period of time. Most mortgages are set at 30 years, although some are 15. Either way, they are paid out over a considerable time period. These two factors help explain why a missed payment can mess up your credit score so badly.
How Much Damage Does A Late Payment Do?
In 2011 FICO released some data from a study that showed the impacts of missing payments, foreclosure and other possible problems that a home owner may run into. It looked at three different individuals with three different credit scores, ranging from 680 to 780. The damage caused by being 30 days late on a mortgage payment was pretty severe, especially for the individual with the highest credit score. From 780, the score dropped to a possible 670 – that's over 100 points.
The time frame for recovery took nearly three years to recover the excellent score. This is pretty substantial, especially for someone who had such a high score to begin with. For someone with only a 680, it would take around 9 months to recover. When a person is late by 90 days on a mortgage payment, the recovery takes around 7 years to get back to the top score. For the 680, it still only takes around 9 months to recover. The difference it recovery time for the lower score compared to the highest score is substantial.
Understanding What Late Means
The impact to credit scores is pretty sobering when you look at the data. It shows that you really want to avoid being late on your mortgage payment if you can manage. But what does late mean? If you were to send in your payment a few days late to your
lender, you would probably not be considered late, at least not by the terms of your loan. Most lenders give you a 15-day grace period to make your loan payment. Perhaps this is because they know just how damaging a reported late payment can be.
For most lenders, you have up to 15 days to make the payment, after which the lender will charge you a late fee. But even then, most lenders will not report your payment as late to the credit bureaus. For you to be reported, your payment needs to be 30 days late.
Lenders report to credit bureaus on a monthly basis. This explains why you will see the loan payment categories of 30 days, 60 days and 90 days. Each month, the lender will send in your information to the credit bureaus, which will include the timeliness of your loan payments. If you are 30 days late, you will be reported, just as you will be at 60-days, and so on. For each level that you reach, you will see a negative impact to your credit score. Past 90 days, you will start to run into real problems. Your loan will go into default and the foreclosure process will go into effect.
How To Fix A Damaged Score
You can fix a damaged credit score over time, but don't be tempted to let your payments slip in hopes that you can remedy the damage easily. As stated before, getting back into good graces with the credit bureaus is time consuming and difficult. You have to make up your late payment as quickly as possible, and then you have to stay current on your payments for months and often years.
Be Careful With Your Initial Mortgage Amount
If you are still in the process of buying a home, take this information as a warning about the dangers of taking out a loan that is too large. You are going to have several different options when it comes to your mortgage, and you should be careful with the level of loan you accept. It is better to have a smaller home and a mortgage you can pay comfortably, that to have a more expensive home and start missing payments. Consult with an excellent mortgage broker and have them go over your financials. Keep in mind the lender often times will lend you more money than you are comfortable borrowing. Just because they will give you are larger loan amount doesn't mean you should get one. Prior to house hunting make sure you get a mortgage pre-approval from your lender of choice. Understand there is a difference between a mortgage pre-approval and pre-qualification letter some lenders will give you. The distinction is crucial for you to understand.
With a pre-approval letter the bank will run your credit, verify your income and verify your employment. They generally do none of these things with a pre-qualification letter. When buying a home this becomes important because the seller will want to know their buyer is financially stable. Without checking ones credit history that is not possible. This is why a pre-qualification letters are not worth the paper they are written on!
Credit scores are obviously important whether you are in the process of buying a home or not. They affect so many things including getting loans for a car, boat or any other large purchase. Your creditworthiness can also impact the rates you get on your credit cards. Do your best not to miss a mortgage payment to keep your credit score healthy.