Table of Contents
How Do Late Payments Impact Your Mortgage Application?
Can You Get Approved for a Mortgage With Late Payments?
How Long Do Late Payments Stay on Your Credit File?
What’s the Difference Between Late Payments and Missed Payments?
How Can You Improve Your Chances of Getting Approved for a Mortgage With Late Payments?
How to Explain Late Payments to an Underwriter
How Far Back Do Mortgage Lenders Look at Late Payments?
Mortgage Approval With Late Payments Bottom Line
How Do Late Payments Impact Your Mortgage Application?
Credit Score Reduction
Late payments are reported to credit bureaus and can lower your credit score. A lower credit score indicates to lenders that you may be a higher-risk borrower, which can affect your eligibility for a mortgage.
Perception of Risk
Lenders view a history of late payments as a sign of financial instability. This increases the perceived risk of lending to you, making lenders more cautious about approving your mortgage application.
Higher Interest Rates
If you get approved for a mortgage despite late payments, you may be offered a higher interest rate. Lenders compensate for the increased risk by charging more interest, which increases your overall borrowing costs.
Can You Get Approved for a Mortgage With Late Payments?
Yes, you can get approved for a mortgage with late payments if you have a strong financial profile. As long as your credit is good enough and you have a high income, you'll still be able to get a mortgage, but you'll likely have to pay a higher rate than you could have gotten without the late payments.
If you are right on the cusp of meeting the credit and income requirements, late fees may tip you over the edge, leading to a denial or stricter requirement from the lender, such as a higher down payment or interest rate.
It also depends on how recent the late payments occurred. If the late payments happened several years ago and you’ve since stayed on track, they may disregard them if everything else is solid. But, if they occurred recently, it may be more of a cause for concern. It varies depending on the lender and the loan type, but it is undoubtedly something underwriters look at when determining your risk profile.
Was your mortgage declined due to late payments? Here's what you'll be able to do to explain the late payments to your underwriter so that your loan can be approved.
How Long Do Late Payments Stay on Your Credit File?
Late payments can stay on your credit file for up to seven years from the missed payment date. This means that even if you catch up on payments or settle the debt, the late payment record will still remain on your credit report for several years. However, the impact of late payments on your credit score tends to lessen over time as they age and as you demonstrate a pattern of on-time payments.
What’s the Difference Between Late Payments and Missed Payments?
Late Payments
Late payments occur when you fail to make a payment on a credit account by the due date specified in the billing statement. Typically, late payments are recorded if payment is made after the grace period. They can have a negative impact on your credit score and may result in late fees or increased interest rates on your accounts.
Missed Payments
Missed payments refer to payments that are not made at all within the billing cycle. Unlike late payments, missed payments are not made at any point after the due date. Missed payments can have severe consequences, including penalties, increased interest rates, and damage to your credit score.
Other types of payments that can affect your credit score are:
Arrears
Arrears refer to payments that are overdue or unpaid, usually in the context of ongoing obligations like rent, mortgage payments, or child support. Being in arrears means you have failed to make payments on time and may face consequences such as late fees, penalties, or legal action by creditors or service providers.
Defaults
Defaults occur when you fail to fulfill the terms of a credit agreement, such as not making payments as scheduled or violating other terms of the contract. Defaulting on a loan or credit agreement can have serious consequences, including damage to your credit score, legal action by creditors, repossession of collateral, and difficulty obtaining credit in the future.
How Can You Improve Your Chances of Getting Approved for a Mortgage With Late Payments?
To improve your chances of getting approved for a mortgage with late payments, here are some strategies to consider:
Address Late Payments
If possible, catch up on any missed or late payments as soon as possible. Bring accounts current and make timely payments moving forward. Build a Positive Payment History: Consistently make on-time payments on all your credit accounts going forward. A pattern of responsible payment behavior can help mitigate the impact of past late payments.
Reduce Debt Levels
Lowering your overall debt-to-income ratio can improve your financial profile and make you a more attractive candidate for a mortgage. Paying down existing debts can also free up more funds for mortgage payments. Strengthen Your
Credit Score
Focus on improving your credit score by using credit responsibly. This includes keeping credit card balances low, avoiding opening new accounts unnecessarily, and monitoring your credit report for errors.
Provide Explanations
If your late payments were due to extenuating circumstances such as medical emergencies or temporary financial hardship, be prepared to explain these circumstances to potential lenders. Providing supporting documentation along with a letter of explanation can strengthen your case.
Save for a Larger Down Payment
Offering a larger down payment can offset the risk associated with your credit history. It demonstrates your commitment to the investment and reduces the lender's exposure.
How to Explain Late Payments to an Underwriter
- Gather the Facts
- Confirm the Payments Have Been Settled
- Write a Late Payment Explanation Letter
- Respond to Follow-up Questions
1. Gather the Facts
If you have a few late payments on your record, it’s not the end of the world. But you’ll want to be sure to gather the facts so you can present your case to the underwriter. For example, perhaps you missed payments because you were going through a difficult time, such as a divorce. Or maybe you were laid off and experiencing financial difficulties but have since gotten back on your feet. If you have a reasonable excuse and evidence to back up your story, the lender will be much more receptive to approving the loan.
2. Confirm Payments Have Been Settled
The next thing to do is be sure that all late payments have already been settled. No lender will approve your application if you still have outstanding debts. Unpaid bills will affect your credit score far more than settled payments, so you should contact your loan servicer if you’re uncertain whether the late payments have been paid.
3. Write a Late Payment Explanation Letter
Next, you should write a letter of explanation and include it in your application for the underwriter to review. This letter should include a thorough explanation of why you missed a payment, what you’ve done to remedy the situation, and how you’ve managed your finances since the late payment occurred. It should also include evidence to support your claims and perhaps a character reference from someone who can back up your assertions.
4. Respond to Follow-Up Questions
After you submit your application and follow-up letter, the underwriter may have additional questions for you. So be sure to respond to inquiries promptly and be as detailed as possible. The more information you provide to support your case, the higher the likelihood of approval.
How Far Back Do Mortgage Lenders Look at Late Payments?
Mortgage lenders consider late payments made within the last 12 to 24 months. Remember that any payment that is more than 30 days late will show up on your credit report. A missed payment will typically remain on your credit report for about seven years, which means the mortgage underwriter can see any late payments as far back as that, although they will typically only look at your payment history over the past year or two.
Every lender sets its own standards to determine when a late payment is a cause for concern. It also depends on the type of loan you're applying for. For instance, they are more lenient with bad credit if you’re applying for a government-sponsored loan such as an FHA, VA, or USDA loan. But nearly all lenders will want to see a clean payment history within the last 12 months.
Mortgage Approval With Late Payments Bottom Line
Late payments, missed payments, arrears, and defaults can all have significant impacts on your credit score and your ability to secure a mortgage. These negative marks on your credit report indicate to lenders that you may be a higher risk borrower, potentially affecting your eligibility for a mortgage and the terms you're offered. However, a late payment on your record (or even several) doesn’t automatically mean you can’t get a mortgage. Lenders will likely still be willing to work with you if you’ve paid any overdue balances and taken steps to improve your credit. But it will affect how a lender views your application.
Despite past credit challenges, there are steps you can take to improve your chances of getting approved for a mortgage. By addressing late payments promptly, building a positive payment history, reducing debt levels, and strengthening your credit score, you can demonstrate financial responsibility and increase your likelihood of mortgage approval. So, if you want to be approved for the best rate possible, be prepared to explain the situation and provide thorough evidence to prove why you’re a trustworthy borrower. Otherwise, the lender may assume you are financially irresponsible and deny the loan