One of the most common things I hear when a prospective client contacts me for a mortgage refinance is “I just missed a mortgage payment and I want to refinance before it’s too late”. When I ask them about their credit, most of them reply “Oh I pay everything on time, I just got behind this one month on the mortgage”.
It breaks my heart to tell them that in many cases, it already is too late. The reason is simple if you really think about it: If your home is your biggest investment, your greatest potential asset and your largest current liability, there is nothing more important than showing that you are able to make the payment on it every month. If you are in a cash crunch, you’re better off missing or underpaying almost any other payment, such as a credit card bill, even your utility bill, instead of missing or even delaying your mortgage payment, because missing one mortgage payment can cost you tens of thousands of dollars over the years.
When you miss a mortgage payment, your credit score may not go down dramatically. But your mortgage credit quality will take a serious beating, and you’ll carry it around for years. When you start out with a mortgage, regardless of what your FICO credit score is, you are rated an “A”, meaning you make your mortgage payments on time. If you miss a payment, and even if you’re just late enough to qualify as 30 days late, the lateness is recorded and you will become an “A-” or a “B”. Just one mortgage lateness can keep you out of the refinance market for up to two years by automatically locking you out of the lowest payment programs. If it sounds a bit like high school, it is, but this time it’s for keeps. Keep missing or delaying payments, and you’ll quickly see your mortgage quality decline to a “C” or “D”, which could prevent you from refinancing entirely, by eliminating your eligibility from even standard rate programs.
This hurts the most when you refinance or are ready to buy a new house, because you are usually borrowing more money than you were previously, either to pay off bills or make home improvements, or because you’re buying a bigger house. So not only are you moving to a higher balance, but your now derogatory mortgage credit will force you into a high rate. If you need the cash to pay off bills and improve your credit urgently, or to purchase a home in a new area because you are relocating for work, you can wind up in a horrible Catch 22, very often disqualified for financing entirely, or with financing so unaffordable that you would rather not.
So what can you do about this? If you do better with automatic payments, sign up for direct debit payment with your lender, or arrange for your bank to automatically pay your mortgage every month on a specific date far enough ahead of the due dates for your other bills, so you won’t be tempted to pay something else. The day after payday is a great day to do this. And the date should be far enough ahead of your due date that the bill is paid and posted on time. It might hurt that first month, but it will even out once you get used to the new schedule.
No matter what, make sure you satisfy your mortgage payment obligation. Most everything else on your credit report can be repaired or negotiated, but not your mortgage lates. Don’t wind up in a situation where you’re ready to dance but too late to the party. Plan ahead, and as always, protect your financial future today.