Editor’s note: Beth Kotz with Credit.com has provided a special blog to explain the effects mortgage delinquency and loss mitigation have on credit.
By Beth Kotz
As a homeowner, your mortgage and your credit rating are inextricably linked. To make sure you maintain solid credit, the best thing you can do is make your mortgage payments on time each month.
Mortgages have a major impact on your credit rating and even have their own category on a credit report.
So if you’ve hit some financial bumps in the road and are unable to make your next payment, be aware that falling behind does have consequences. While one isolated incident won’t set you back too far, if you’re unable to pay for longer you should know how this will impact your credit and what impact loss mitigation options can have on your rating as well.
Delinquent Mortgage Payments and Your Credit
Mortgage contracts typically include a grace period. If you make a payment just a few days after the due date, it will likely fall within this period. The lender still counts the payment as being on time, so there is no negative effect on your credit. Grace periods are usually 10 to 15 days.
If you miss the due date and the grace period, a mortgage payment will be considered late. According to Sarah Davies, Sr. VP, Analytics, Product Management and Research with VantageScore, “Becoming 30 days delinquent on a mortgage loan can cause even a high credit quality consumers’ credit score to decline by as many as 100 points.”
Your lender will report the delinquency to credit reporting agencies. It will appear on your credit report as a “Late 30” note. If you make the payment within 30 days, this note will go away after the next reporting period, and will not cause lasting damage to your credit score.
When mortgage payments are more than 30 days late, however, or when a consumer is repeatedly late making payments, the adverse effects on credit are more serious. Paying your mortgage 90 days late or more will damage your credit score for up to seven years.
If you fall more than 120 days behind on your mortgage, the lender normally considers you in default. You will receive a “Notice of Default” (NOD). A NOD is the first formal action a lender takes in a process leading to foreclosure. Because a NOD is a public document, it will be noted on your credit record and can also cost you in the form of late fees and higher interest rates. However, it is not as damaging as a foreclosure.
When a consumer falls too far behind, the lender can foreclose on the home. If you lose your home to foreclosure, or if you give it back to the lender via a deed in lieu of foreclosure, your credit score will drop by approximately 250 to 280 points. Restoring your credit score to a place where you will be able to secure a new mortgage with a lower interest rate and better terms will take about three years of on-time, consistent payments.
However, foreclosure proceedings typically take months or years and you can still try to work out an arrangement with the lender. If you take the initiative to stay in touch and find an option that will work, most lenders will work with you.
Loss Mitigation and Your Credit
Loss mitigation is a “catch-all” term that refers to any option that will help a homeowner who is behind on a mortgage to get caught up. There are several such options, and they have varying effects on credit.
If you realize you are faced with a financial problem such as job loss or unexpected medical bills, you can ask your lender for a forbearance. You may need to act immediately as lenders may not grant a forbearance if you are already seriously delinquent on your mortgage. Under a forbearance agreement, you make smaller payments or no payments at all for a period of time. After you resume regular payments, you will also need to make up the payment amount that was skipped during the forbearance. The good news is that a forbearance will not negatively affect your credit.
Another option you may have is a loan modification. Essentially, loan modifications are permanently restructured mortgage contracts. The key feature of a loan modification is that it requires the lender to list the debt as current or paid in full with credit reporting agencies as long as you comply with the loan modification requirements. You should beware loan modifications that don’t present rigorous qualification guidelines as they can actually be debt settlement arrangements – which will hurt your credit.
Loan modifications endorsed by the U.S. government – like the Home Affordable Modification Program (HAMP) – will not impact your credit. If you continue to meet the requirements of the loan modification program, the mortgage will continue to be reported as current and paid in full. Government assistance benefits are not reported to credit bureaus. As such, applying with Keep Your Home California will not affect your credit score.
If you’ve fallen behind on your mortgage, remember that the situation isn’t hopeless. The worst thing you can do is ignore the problem and wait for it to disappear. Be proactive, educate yourself about loss mitigation assistance and contact your lender right away. If you live in California, a great first step is to contact Keep Your Home California to see whether you might qualify for assistance.
Remember, the bank or other mortgage provider does not want your home. Foreclosure is an expensive last resort for the lender. If you take the initiative to keep in touch and do your best to work out an agreement that will bring your account up to date, it will minimize any harm to your credit.
Beth Kotz is a contributing writer to Credit.com. She specializes in covering financial advice for female entrepreneurs, college students and recent graduates. She earned a BA in Communications and Media from DePaul University in Chicago, Illinois, where she continues to live and work.