Depending on your financial circumstances, your mortgage payment can represent a substantial portion of your monthly expenses. If you lose your job or experience a reduction in income, you may have difficulty making your mortgage payments on time. However, failing to make timely payments, also called slow paying, on your mortgage loan can affect your creditworthiness in several ways.
Late Payment Reporting
Paying your mortgage within 30 days after the due date will not impact your credit score. However, if you pay more than 30 days after the due date, your mortgage lender may report your slow payment to Experian, TransUnion and Equifax, which are the primary credit reporting agencies in the United States. A 30-day late payment report can lower your credit score; however, repeated late payments and 60-, 90- and 120-day late payment reports can have a more dramatic effect. The exact effect of late payments on your credit score depends on how high your score was before you fell behind on your payments.
Foreclosure
If you continue to fall behind on your payments -- usually between 60 and 120 days late, although time frames vary by lender -- your mortgage lender may consider your loan to be in default. It will send a demand letter stating that you must bring the loan current to avoid foreclosure. If you not pay the past-due balance within the time frame stated in the letter, the mortgage lender may foreclose on your home. This means that it sells your property at an auction and forces you to move out. A foreclosure can further lower your credit score, which was likely already damaged by late payments leading up to the foreclosure action.
Deficiency
You may assume that if your lender forecloses and sells your home, you are free from any further financial obligations. However, the lender may not sell the home at a price high enough to cover your loan balance. If the selling price is less than your balance, you are responsible for the difference, called a deficiency. The lender can attempt to collect, and even sue you for, the deficiency amount. However, state laws vary regarding requirements for deficiency judgments. Failing to pay or incurring a lawsuit for a foreclosure deficiency can add to your credit damage.
Minimizing Credit Damage
Contacting your lender before you fall behind on your mortgage payment is an effective strategy for minimizing or preventing credit damage. Your lender may grant a temporary payment forbearance or deferment to help you through a short-term financial difficulty. It may offer refinancing options to extend your loan terms and allow you to save money through lower interest rates. You may also qualify for a loan modification, which reduces interest, forgives part of your loan balance or extends your loan repayment time frame to lower your payments. If a lender forgives a portion of your loan through a modification, it may report a debt settlement to the credit bureaus; however, the impact is less dramatic than a foreclosure or deficiency lawsuit.
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