Late payments often disqualify you for any loan program, including a refinance. Your mortgage history plays a major role in determining your credit worthiness. In fact, some lenders hold it higher than your credit score itself. That being said, some lenders look at the whole picture. This may allow you to secure a refinance even with a late mortgage payment. It depends on the circumstances.
What is Your Credit Score?
The first step is to determine your credit score. If you wish to refinance with a fully verified program, such as a conventional refinance, the lender needs to look at your credit score. If it is on the lower end, you pose a risk. If you add to that risk the late mortgage payments, you are an even higher risk. On the other hand, if you have a higher credit score, yet you have one late payment in the last 12 to 24 months, a lender may be able to overlook it. They will want an explanation for the late payment and assurance that it will not happen again, though.
The VA and FHA allow streamline refinances. This means you have to provide very little information in order to refinance. They mainly rely on your mortgage payment history. If you have late payments, you might not qualify for the program. The VA does allow one late payment in the last 12 months, but it is up to lender discretion whether they will allow it or not. Looking at it from the lender’s perspective, they only have your mortgage history to use for qualification purposes. You do not need to verify your income, assets, or the value of your home. If you have late mortgage payments, you pose a risk that they may not want to take.
What is a Late Payment?
It helps to understand the definition of a late payment. If you pay the mortgage payment within 30 days of its due date, the credit bureaus do not report it as late. It is after the 31st day that they consider the payment late. Even if you paid the mortgage payment after your grace period, but before the 30 days are up, the credit bureau would not report the payment late. Of course, this is not a recommended course of action as any payments made after the grace period incur late charges, which can really add to your expenses.
Private Lenders May Allow Late Payments
There are private lenders who may overlook late payments. This is, of course, if you have a good reason for the late payments. You have to be able to provide a Letter of Explanation with plenty of details regarding the late payments. For example, were you laid off unexpectedly? Did you become ill and unable to work? These special circumstances may allow a private lender to consider your case. In addition, however, they want to see any of the following:
- Plenty of assets on hand to serve as reserves in the event that the situation was to occur again
- Stable employment and income – The longer you hold the same job, the less risk you pose
- An increase in income since the late payments occurred
Another consideration is how much equity you have in the home. If you wish to refinance a home where you have minimal equity and late payments, the lender may hesitate. If, on the other hand, you have plenty of equity, say 30%, the lender knows you have a lot invested and want to keep the home. In this case, if you have compensating factors to make up for your late payment, you may obtain an approval.
Stay Current on Your Payments
The key factor is to stay current on any future payments after a late payment. The longer period that passes between your late payment and now, the better your chances of approval. Lenders want to see at least a 12-month history with no late mortgage payments. Private lenders may have exceptions to that rule and certain FHA or VA lenders may also provide an exception. However, the longer period of time you have with no late payments, the better off you will be.
The key to obtaining approval is to shop around with different lenders. Even amongst the VA and FHA programs, lenders can have their own requirements. Just because the VA may allow one late payment does not mean a lender must accept it. The lender funds the loan, not the VA, so the lender has input. If the lender does not want to take the risk, they do not have to.
As you shop around, compare the rates and closing costs the lenders offer. Some lenders may hit you for your late payment. This means a higher interest rate and more points on the loan. This equals higher costs. You may not benefit as much from refinancing if this were the case. Make sure to figure out your break-even point, where you start making money from the savings after getting your closing costs paid off. You should also only look for a rate/term refinance – a cash out refinance provides the lender with an even higher risk. If you have a late payment, most lenders would not be willing to add to that risk and give you cash out of the equity of your home. This puts the lender at higher risk for default.