How Late Payments Affect Mortgage Approval
This article is about how late payments affect mortgage approval. One of the most frequently asked questions at FHA Bad Credit Lenders is how late payments affect mortgage approval. Most Americans have basic knowledge when it comes to credit scores and uses tools to track their overall credit profile.
With any mortgage loan program, lenders understand borrowers can have credit mishaps during their lives. There are instances where bad credit can hit you from all angles. Unemployment is one of the biggest reasons consumers cannot pay their bills. Once the income flow stops, making the minimum monthly debt payments is difficult. This is how late payments start and hurt your credit.
It is fine to have periods of bad credit, collection and charge-off accounts that is not paid, but lenders do expect you to have been timely on all of your monthly debt payments for the past 12 months. What happens if you have not been timely on your monthly payments in the past 12 months? The FHA Bad Credit Lenders team are experts on getting you approved with recent payments. Let’s read on……
What You Need To Know About Late Payments To Qualify For a Mortgage
Most Americans do not know the impact of derogatory credit events on their credit score. This blog will detail the severity of missed payments and how they will affect your mortgage qualifications. In America, we use three main credit bureaus for lending purposes. These credit bureaus are Experian, Equifax, and TransUnion.
The three giant credit reporting agencies will report all payment history from your creditors. You are allowed a 30-day grace period. But once the 30-day grace period passes, you are reported as 30-days late on all three credit bureaus.
To get an approve/eligible per automated underwriting system (AUS), you need timely payments in the past 12 months. One or two late payments is not always deal killer. However, timely payments in the past 12 months is crucial if you want to get a mortgage approval.
Mortgage Denied Due To Late Payments in The Past 12 Months
One of the biggest reasons why people do not qualify for a mortgage is due to late payments in the past 12 months. Recent late payments in the past 12 months is one of the worst credit hits you can have. Lenders put strong emphasis on your recent payment history. You overall payment history is important but the latest most recent payment history is the most important.
The team at FHA Bad Credit Lenders are experts in helping borrowers with recent late payments qualify and get approved for mortgage loan.
A recent late payment is not always a deal killer. Not all lenders have the same lending guidelines on late payments. It is still possible to get approved for a mortgage with one or two late payments in the past 12 months. However, many lenders will not approve late payers for a mortgage. In the following paragraphs, we will cover and discuss on how to qualify for a mortgage with recent late payments in the past 12 months.
Can You Get Approved For a Mortgage With Late Payments?
Each credit bureau has a few different credit scoring models, and a mortgage score is typically the most strict. This is because a home is the most expensive purchase most Americans will make in their lifetime. FHA and non-QM loans are the only two mortgage loan options consumers have to get a mortgage approval with late payments in the past 12 months.
FHA loans will get you an approve/eligible per automated underwriting system with a larger down payments. For example, a 20% down payment on an FHA loan will render you an automated underwriting system approval whereas other mortgage loan programs will NOT.
Credit scoring can be incredibly confusing. FHA Bad Credit Lenders are experts with lower credit scores and mortgage lending. We do not have lender overlays and can close loans even with late payments present on the credit report. We encourage our readers to call us at FHA Bad Credit Lenders at 630-659-7644 to discuss their credit profiles.
How Late Payments Affect Mortgage Approval and Credit Scores
As your crazy life unfolds, sometimes things happen where you end up with a late payment on your credit report. This could mean you had to prioritize other life expenses over making your credit card or vehicle payment. Or you just may have forgotten to make your payment on time.
If you overlooked making a payment on one of your bills and got reported a 30-day late on the credit bureaus, try contacting the creditor and ask for a one time courtesy in having the 30-day late payment removed. If you have been a loyal customer of the creditor, there is a good chance they will remove the late payments for a one-time courtesy.
Unfortunately, the credit bureau does not care about your reason for being late. A late payment is a late payment in the eyes of the credit bureaus. Missing a payment is not a good feeling, especially since you know it will affect your credit score.
How Does a Late Payment Impact Your Credit Scores For a Mortgage?
When you make a late payment, your score will go down. How far will it go down? Well, this depends on the type of account you were late on, how much you owe on that account, and how late your payment is.
One 30-day late payment on your credit report can easily drop your credit scores by 100 points. It will decimate your credit scores so it is best to avoid ever getting a 30-day late payment. The good news is your credit scores will continue to increase as the late payment on your credit report ages and time passes.
No matter what, you are going to have a negative impact on your credit score. Pay the overdue account within 30 days of missing the payment if possible. This will make sure your account does not go into default.
Rolling Late Payments And Over 30-Plus Day Late Payments
If your account continues to go unpaid after your 30-day late payment to 60 days late, you will see another negative mark on your credit report. Once again, you will see a negative remark after 90 days late and every 30 days after that. Your account will eventually be reported as delinquent and will continue to impact your overall credit score negatively.
A rolling late payment is when you are just behind one 30-day late payment but the creditor keeps on reporting as being 30-day late every months because you haven’t caught up with the first late payment. If you have a one 30-day late payment and you have not caught up with the previous late payment and the current payment due, you can be reported as what you call a 30-day rolling late which not good for your credit profile.
If you do make a late payment, there are a few things you should look out for. First, you could be charged a late fee. If you pay a credit card bill even a single day late, you could be charged an additional late fee on that account. This could be around $35, reflected on your next billing statement.
Can I Get a Mortgage With a 90-Day Late Payment?
If you miss payments after the due date, you will continue to accrue late fees. If you pay a credit card late, your company may increase your interest rate. Paying your creditor late may increase your interest rate, often resetting your interest rate to a penalty or default APR.
Many consumers are under the impression that a charge-off accounts relives them of their outstanding debts. This cannot be further from the truth. Creditors can still aggressively pursue collection activity on charged-off accounts. Many charged-off accounts are transferred to the creditor’s legal department where creditors sue to get a judgment against the consumer.
After you are 30-days late on your debt payments, you will most likely get calls from the collection department of the creditor. Eventually, the creditor will sell you credit account to a collection agency. Collection activities will aggressively continue until you enter the fourth month. If you do not make a credit card payment for 120 days, you account will go into charge-off status. A charge-off accounts by no means discharges or relieves you from paying your debt. Collection agencies can still pursue charge-off accounts.
How Late Payments Affect Mortgage Approval and Impact Credit Scores
Many borrowers utilize promotional 0% APR on a balance transfer credit card. Still, as soon as the late payment is made, you typically forfeit a 0% interest and will now pay the default interest rate on the entire balance. This can add up very quickly. As stated above, late payments will also appear on your credit report.
How Much Do Late Payments Drop Your Credit Scores?
These late payments could affect your ability to take out loans. Late payments will also decrease your credit score. Payment history accounts for about 1/3 of your total credit score. Making just one late payment can significantly impact your credit score. The first late payment will be a dagger if you have good or excellent credit scores.
A late payment will substantially drop your credit scores. However, over time and as the late payment ages, your credit scores will slowly improve. After two years, the negative impact of the late payments will no longer affect your credit scores.
Depending on how late your payment is, how frequently you do not pay on time, and your current credit score, the severity of the late payment will vary on your credit scores. The consequences of a single late payment may feel harsh; don’t let it discourage you from paying future bills on time. Each late payment will significantly impact your credit score. Credit scores can be ruined quickly, but it takes time to bounce back.
Rebuilding and Re-Establishing Your Credit To Qualify For a Mortgage Loan
The best thing you can do to start rebuilding your credit score is to pay your bills on time and have a positive payment streak. Paying more than the minimum payment is going to help as well.
The easiest and fastest way to increase your credit scores and rebuild your credit is to get three to five secured credit cards with at least a $500 credit limit. The higher the credit limit the better your chances of boosting your credit scores.
The more on-time payments you make in a row will reduce the amount you owe on the account, diminishing the impact on your credit score over time. To maximize your credit scores, make sure to have your credit utilization ratio at or lower than 10% credit utilization ratio. Maxed-out credit card balances will plummet your credit scores.
Can I Get Mortgage Approval With Collection Accounts?
If your payments continue to be paid late, your creditor may mark your account as delinquent and send you to collections. Once the account is reported as a collection, it may stay on your credit report for up to seven years. A new collection account will create even more damage to your credit score.
Outstanding collections and charge-off accounts do not have to be paid to qualify for a mortgage loan. You can get a mortgage loan approval without having to pay collection and charge-off accounts. However, lenders do expect timely payments in the past 12 months.
A recent collection account could be the difference in qualifying for a mortgage. You do not have to pay outstanding collection accounts to qualify for a mortgage, no matter how large the outstanding balance is. You do not have to pay outstanding charged-off accounts to qualify for government and conventional loans.
Impact of Late Payments on Credit Scores
Why do late payments negatively impact your credit score? Since payment history is one of the main drivers of your overall credit score, banks and lending institutions will want to see your ability to pay your creditors.
When mortgage underwriters review you overall credit history, they will want to see how your credit payment history was before your late payments and after your late payments. A pattern of late payments shows financial irresponsibility.
A long-standing history of on-time payments will suggest you are a responsible borrower, and a lending institution will likely extend your credit.
Good Credit Scores Versus Payment History
If you have a poor history of paying bills on time, this will show a lender that you are not financially responsible. They will be less likely to extend credit your way. Credit scoring models utilize a long algorithm to compute your score, and as stated above, payment history makes up about 1/3 of the total equation.
Mortgage underwriters will see the overall credit payment history of the borrower. They want to see an overall good payment history but a period of bad credit is fine. However, timely payments after a period of bad credit is a must. Timely payments in the past 12 months is very important for a mortgage loan approval.
This is why a late payment will have a more dramatic impact than a credit inquiry on your overall credit score. It is better to have lower credit scores and timely payments in the past 12 months versus high credit scores with late payments in the past 12 months. Lenders want to see mortgage loan applicants who have had credit issues but have re-established themselves and are now timely on their payments.
How Late Payments Affect Mortgage Approval Per AUS
So you know you have a late payment report to the credit bureaus. What should you do next? If your bills are past due, you must pay them as soon as possible. The sooner you pay the bill, the better. Timely payments in the past twelve months is what the automated underwriting system (AUS) will look for to issue an approve/eligible per AUS.
One or two late payments is marginal and may or may not render an automated approval. FHA loans will render an automated approval normally with a 20% down payment with late payments in the past 12 months.
Non-QM loans will accept late payments in the past 12 months with 20% to 30% down payments. Other mortgage loan programs will require 12 months of timely payments in the past 12 months for an automated underwriting system approval. The damaging effects of late payment will increase the longer the bill is delinquent. Below are a few things you could try to recover your credit score.
How To Fix Late Payment on Your Credit Report
Call your creditor and request the removal of the late payment. The creditor may give you a one-time late payment removal if this is your first late payment. If you are in good standing with the creditor, there is a small possibility the bank will forgive the late payment and remove this from your credit report. This is the ideal result and will help your credit score recover quickly. Please keep in mind this is a long shot, and the creditor is not required to remove the late payment.
How Bad Credit Affects Your Mortgage Rates
Work with your creditor to reset your penalty interest rate. As stated above, a late credit card payment may increase the interest rate on your account.
Late payments has no impact on your mortgage rates. It is credit scores that affect mortgage rates. Late payments will drop your credit scores. Recent late payments can drop your credit scores as much as 100% points. Therefore, lower credit scores can affect mortgage rates.
The creditor is typically required to reset your interest rate back to the pre-penalty interest rate after making on-time payments. Usually, this happens after six on-time payments. It would be best if you made it your goal to get back to the normal interest rate without missing more payments. The higher interest rate means the more money you owe the creditor.
Timely Monthly Payment on All of Your Bills Is A Must
Make payments on time. This may sound easy, but it can start to snowball after your first late payment. Consumers with multiple credit cards can easily forget making a five dollar per month minimum monthly payment. It is not the dollar amount that drops your credit scores. It is the fact that you missed a monthly minimum amount due.
All consumers should set up automatic payments on all minimum monthly payments due with their bank account so there is no chance of ever missing a monthly payment. Pay attention to annual fees on credit cards. You do not pay the minimum annual fees due, you will be hit with a 30-day late payment.
Since the late payment will likely cause your credit scores to drop, the best thing you can do is to start making all payments on time for each account you have reporting to the credit bureaus. A few months of on-time payments will help slowly improve your credit score. Setting up automated payments and reminders on your calendar can help your payment history.
Monitoring Your Credit Score
Monitoring your credit score with free tools, such as credit karma, can help keep you updated on your payment history. While services such as credit karma are not a good tool to monitor your mortgage credit score, they are a great tool to monitor payment history. These are free services that can break down factors that are affecting your credit score. It will also help you keep an eye on your payment history. Each month that goes by, where all payments are made on time, will show a positive credit history and improve your credit score.
Late Payments Due To Coronavirus Outbreak
What about late payments brought on by COVID-19? It is no secret that many individuals and families across the nation have suffered financial hardship due to the COVID-19 pandemic. If you or your family member have felt the impact of the coronavirus and have missed payments, you are not alone.
Consumers with a temporary forbearance due to coronavirus financial relief need to make sure when the reprieve period is over and make sure they do not miss the minimum payment due.
Federal, state, and local governments have programs to ease Americans’ financial burden. The CARES ACT was implemented to help families suffering from financial hardship. Some auto lenders, credit card companies, mortgage servicers, and student loan lenders have been able to pause payments on your accounts during the COVID-19 coronavirus outbreak.
Rebuilding Your Credit To Qualify and Get Pre-Approved For a Mortgage
We have also experienced individuals able to call their creditors and get late payments removed due to the pandemic. If you have a late payment, it is a good idea to call the creditor and see if there is any relief from the COVID-19 coronavirus.
The easiest and fastest way of rebuilding and re-establishing your credit is by getting three to five secured credit cards with $500 credit limits. Along the three to five secured credit cards, you should get two to three credit rebuilder accounts through www.self.inc or through your local bank or credit union. Many local banks and credit unions have credit rebuilder accounts which should help you tremendously rebuilding your credit.
Getting a late payment removed from your credit report is the best-case scenario. This will instantly impact your credit score in a positive way.
Get Started With A Lender Licensed In 48 States With No Overlays
The FHA Bad Credit Lenders team are experts in low credit score mortgage lending. Our team is up to date on the changing guidelines in the mortgage industry. We would love the opportunity to put a second set of eyes on your mortgage qualifications. We are available seven days a week and can be reached directly at 630-659-7644 or via email at mike@gustancho.com. If you are running into a lender overlay or are not receiving the advice you believe you need, please reach out to our team today. The team at FHA Bad Credit Lenders is available seven days a week, evenings, weekends, and holidays.
This blog on how late payments affect our mortgage approval was updated on January 24th, 2023.
