Can You Refinance If You Are Behind on Mortgage Payments?

If there’s one thing all lenders look at when qualifying you for a refinance, it’s your mortgage payment history. Lenders want to see that you pay your mortgage payments on time. In other words, you should not have any late payments in the last 12 months.

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What if you do have a late payment? Are you out of luck?

You may have options, but it may require some shopping around.

What Type of Loan do You Have?

First, start with your loan type. Do you have a conventional (Fannie Mae), FHA, or VA loan? If your loan isn’t owned/backed by any of these entities, then you may have a portfolio loan (loan owned by your bank). Each loan program has its own requirements regarding late payments:

  • Conventional loans – If you have any late mortgage payments on your credit report, you’ll generally have to wait until you have a clean 12 months to apply for a conventional loan refinance. Your only option with conventional loans would be HARP, the Home Affordable Refinance Program, which allows one 30-day late payment.
  • FHA loans – FHA loans have flexible guidelines, which sometimes includes allowing one 30-day late payment. If you are using the FHA streamline program, your chances of refinancing with a late payment are even higher because this program lowers your payment and/or interest rate. This does vary by lender, though, not all lenders allow late payments.
  • VA loans – VA loans have similar guidelines to FHA loans. Certain lenders may allow one 30-day late payment. You must make sure, though, that the late payment isn’t within the last three months. This could disqualify you for the program.

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What is a Late Payment?

It’s important to understand how lenders view late payments. You have a due date for your mortgage. Let’s say it’s the first of the month. If you don’t make your payment by the first, technically, your payment is late. But it’s not late enough to report it to the credit bureaus. In fact, many mortgage companies allow a 15-day grace period beyond the due date that you can pay the mortgage without incurring late charges.

Even if you make the payment after the due date and outside of the grace period, the credit bureau still might not report it. Lenders don’t let the credit bureau know of your late payment until it is 30 days past due. At this point, your credit history is marked and your credit score will likely drop.

So you can rest assured that even if you made a few mortgage payments late, but less than 30 days late that you may still be able to refinance.

Shop Around

No matter what type of program you have, it’s important to shop around. Each lender has different requirements. Even though they may offer the same loan programs, lenders can add what they call lender overlays. These are additional requirements on top of what Fannie Mae, the FHA, or the VA requires. This is because lenders are the ones that fund the loans; their money is at risk. Even with the FHA or VA guarantee, lenders still face a risk of loss.

If you want to refinance, it’s a good idea to have a 12-month history of on time mortgage payments. Your chances of securing the lowest interest rate and the lowest fees are the greatest this way. If you do have a late payment, make sure you have factors to compensate for it, such as plenty of cash reserves, a long and stable employment history or a low debt ratio.

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