Foreclosure vs. Late Mortgage Payments: Is Late Better Than Never?

By Gina Pogol
Mortgage Credit Problems Columnist

Sometimes homeownership doesn't work out well. Job losses, medical problems, or legal judgments can derail your ability to make mortgage payments. Now, you're trying to get out with the least amount of damage to your finances and your credit rating.

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Late Mortgage Payments and Your Bad Credit

Understandably, mortgage lenders don't look kindly on any blemish on a mortgage payment history. A late payment on a mortgage is weighted much more heavily than late payments on any other kind if debt. Underwriters assume that your performance on a new mortgage will pretty much mirror your payment habits on previous mortgages. Even if it's the only account you pay as agreed, you should always try to get your mortgage payment in on time.

Being more than 30 days late on your mortgage four times or 60 days late twice will drop your credit grade to B or even C. This means that your credit card companies could increase the rate on your balances, and that your next mortgage may come with a higher down payment requirement, hefty fees, and an ugly interest rate. Letting your mortgage go for more than 90 days will drop your grade to a D.

F Is for Foreclosure

Foreclosure is considered far more serious than bankruptcy, and way beyond merely paying late. A foreclosure immediately drops you to the lowest credit grade there is, and it takes years to move out of the financial basement and back to "respectable" status. In addition a foreclosure can come with unintended consequences:

  • In most states you will owe your lender money if the property sells for less than your balance. This is called a "deficiency" and courts will enforce it.
  • Your credit rating will take a bigger hit than if you filed for bankruptcy
  • It will be harder for you to rent or buy a place to live--and you'll have to move somewhere.
  • You may also incur legal fees.
  • A foreclosure on your credit report could make it harder for you to get approved for many things, from auto insurance to job applications.

Foreclosure Prevention: Workouts Are Not Just for Muscles

When it becomes apparent that you are not going to be able to make your mortgage payment on time, contact your lender immediately. Ask for their workout or resolution department. Be prepared to provide detailed debt and income information and documents. Your lender may be able to restructure your loan and add the late payments to your balance. If you start paying on time, your credit will almost immediately improve. With 24 months of good payments and no additional glitches you can have A-rated credit.

Refinancing to the Rescue

If your mortgage credit problems are the result of your mortgage rate and payment adjusting to un-makeable levels, you could be a phone call or email away from saving your credit rating and your home. FHA HomeSecure was created just for you and homeowners like you, people who took out adjustable rate mortgages but couldn't afford the higher payment when the rate reset. Even late mortgage payments won't disqualify you if you paid on time until your interest rate adjusted. And if you have a first and second mortgage that together amount to more than your home is worth, you may still qualify for a new fixed rate first mortgage from FHA.

ARM Yourself with Information

Go online or get on the phone. Check with several lenders about your options for refinancing out of an ARM. If refinancing isn't an available, call your lender before it calls you. And if you're too bashful to call your lender, find a Housing and Urban Development (HUD) counselor at 800-569-4287 and get some good advice fast. Mortgage problems are like a disease: the faster you attack them the more likely that they can be cured.

Federal Trade Commission HSH Financial Publishers US Dept of Housing and Urban Development

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