Mortgage Approval With Late Payments

By PropertyClub Team
Jul 31st 2022
Lenders can decline your mortgage application due to late payments, especially if they occurred within the last 12 months. They may decide to overlook it if you otherwise have good credit and a solid explanation of why the payment was late. But, it’s up to their discretion to determine whether or not it impacts your creditworthiness as a borrower.

hash-markCan You Get Approved For a Mortgage With Late Payments?

Yes, you can get approved for a mortgage with late payments, although it will inevitably affect the loan terms. It all depends on how the rest of your financial profile looks. You may still get approved if you have good credit and enough income. 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 cause for concern. It varies depending on the lender and the loan type, but it is certainly something underwriters look at when determining your risk profile. 

hash-markHow Far Back Do Mortgage Lenders Look at Late Payments?

Mortgage lenders will be able to see all late payments on your credit report, but most will only consider those 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.

hash-markHow to Explain Late Payments to an Underwriter

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 late payment explanation letter 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. 

hash-markMortgage Approval With Late Payments Bottom Line  

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.

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.