If there’s one thing most lenders look at when qualifying you for a mortgage, it’s your credit, which includes your mortgage payment history. Lenders want to know that you are a good risk and that you won’t default on your loan.
So what happens if you have late payments on your mortgage? Are you out of luck when it comes to refinancing?
Keep reading to find out more.
Understanding the Late Payment
First, you should understand what lenders consider a late mortgage payment. If you pay your mortgage a few days after its due date, it’s not late. In fact, as long as you pay your mortgage within 30 days of its due date, it’s not late. Yes, you’ll pay a late fee for not paying within the 10-day grace period, but your credit report won’t get hit with a late mortgage payment. The credit bureaus don’t consider the loan payment late until you pay it more than 30 days after the date that it is due.
What’s the Big Picture?
Lenders look at what’s called the big picture when qualifying you for a mortgage. In other words, they don’t focus on just your credit score or the fact that you have late mortgage payments. They look at every aspect of your application, which includes:
- Your credit score
- Your income
- Your debt ratio
- Your mortgage payment history
- Your home’s value
- Your loan-to-value ratio
They look to see your total risk of default. For example, one borrower may have a low credit score, but have a low debt ratio and low LTV too. If his credit history shows that he has overcome any issues that may have caused the late mortgage payments, a lender may overlook the late payments and allow the refinance.
On the other hand, if a borrower has a low credit score, late mortgage payments, a high debt ratio, and a high LTV, it’s a whole different story. This borrower poses a high risk of default and probably won’t be able to find a lender willing to refinance his loan.
Have you Overcome the Issue?
What lenders really want to know is if you’ve overcome the issue that caused your late payments. In fact, some loan programs, such as the FHA and VA loans, even allow one 30-day late payment within the last 12 months while still allowing approval.
The key is showing the lender that you have overcome the issue. Let’s say you had a late payment a few months ago because you lost your job unexpectedly. If you’ve since found a job and picked up the pieces, you can show a lender that you’ve overcome the issue.
Even if your reason isn’t anything to do with losing your job, but it was some type of temporary circumstance, such as falling ill, you can prove the situation to the lender. Basically, what they want to see is that your income fell for a short while due to your unforeseen circumstance and that you’ve since picked up the pieces and that your income is back to normal. The more proof that you can provide the lender regarding the situation, the better your chances of getting approved become.
Try Subprime Lenders
If you have more than one 30-day late payment within the last 12 months, though, you may have a hard time refinancing your loan with any of the standard conventional, FHA or VA lenders. If you really need to refinance, you may have to opt for a subprime lender. While the name seems ‘bad,’ subprime lenders are just lenders that keep the loans on their own books rather than selling them on the secondary market.
What’s nice about the subprime lenders is that you can find lenders that will cut you some slack even with more than one 30-day late payment. These lenders often have more flexible guidelines, but in exchange, they charge higher interest rates and/or closing fees. It’s up to you to decide if the refinance still makes sense with the higher cost of the subprime loans.
The short answer to the question is that you can refinance with late payments. It just depends on how late your payments are and what type of loan you are trying to get. If you can’t get the loan that you want, you may have to wait until you have a 12-month period with no late payments (or a maximum of one late payment).