What Happens If I Skip a Mortgage Payment?

"What happens if I skip a mortgage payment?" is one of those questions we hope you never have to ask, but life is unpredictable: Sometimes no matter how carefully you plan, you may find yourself short on the funds you need to pay this crucial monthly bill. So what happens if you skip a mortgage payment for just one month?

Don’t worry—there's no need to panic quite yet. But there are consequences to missing a mortgage payment, so you'll want to know what's in store.

What if you're late on your mortgage payment? 
Every home loan agreement offers borrowers a grace period for late payments. (Most mortgage payments are due the first day of the month but policies can vary, says Guy Cecala, chief executive and publisher of Inside Mortgage Finance.) Typically, there’s a 15-day grace period, in which case you would have 14 days after your payment is due to pay your bill without incurring a late fee. However, “I’ve seen some late fees kick in after seven days,” Cecala says, who recommends checking your policy carefully to see how long your grace period is.

Late fees are based on your mortgage agreement, loan type, and state regulations, but generally the average is 4% to 5% of the overdue payment. So, for a $1,000 monthly mortgage with a 5% late penalty, the fee would be $50. That might seem like a drop in the bucket, but “late fees are a good source of income for mortgage lenders,” Cecala points out.

How a missed mortgage payment affects your credit
Mortgage lenders typically report late payments to credit bureaus after they become 60 days past due—meaning you usually have two months to make up for a missed payment. After the 60-day mark though, your credit score (a reflection of how you've managed past debts) might take a big hit.

According to data from credit analysis firm FICO, someone with an excellent credit score—780 or above—could see it drop 90 to 110 points if the person has never missed a payment on any credit account. In comparison, someone with a 680 credit score and two pre-existing late payments on his credit report may see a 60- to 80-point drop for a mortgage payment delinquency.

Will my bank start foreclosure proceedings if I miss one payment?
The short answer is no.

“The foreclosure process takes a lot longer these days because of the foreclosure crisis [of 2008],” Cecala says. “Mortgage lenders don’t want to foreclose on your home because it results in a loss or a cost to them."

Nonetheless, your mortgage is technically in default if you’re more than 90 days late on your mortgage payments—even just one. At that point, you’ll receive a letter from your mortgage servicer notifying you that you’ve defaulted on your loan; you then typically have 90 days to pay off your most recent bill before your mortgage lender can begin foreclosure proceedings.

I don't think I can make next month’s payment. What are my options?
Your first step is to contact your mortgage servicer and explain your financial situation. “People often feel like they don’t want to turn themselves in, but you don’t know what your options are until you talk to your lender,” Cecala says. Plus, mortgage lenders tend be more accommodating if you notify them in advance that you can’t make an upcoming payment.

You might qualify for a special forbearance, a process where your servicer gives you a temporary break from your mortgage payments.

“It’s essentially an extended grace period,” says Cecala. Alternatively, you may be able to work out a repayment plan with your lender where you agree to pay down past-due amounts on your mortgage over a set period of time.

If you can’t afford to make your mortgage payments (say, due to a layoff or emergency medical expenses), Cecala also recommends looking at the federal government’s Home Affordable Modification Program.

“Through HAMP, homeowners who are not unemployed but struggling to make their monthly mortgage payments may lower their monthly payments and make them more affordable and sustainable for the long-term,” says the Federal Housing Finance Agency’s website. You’ll have to meet certain requirements to qualify. For example, you must have obtained your mortgage before Jan. 2, 2009, and “in general you can’t qualify if you have a jumbo loan,” Cecala says. (Call 1-888-995-4673 for free to speak with a HUD-approved housing counselor to see if you can take advantage of the program.)

How can I avoid a missed payment in the future?
The best way to ensure you won’t miss a mortgage payment, says Cecala, is to set up automatic bill pay so that the money is automatically withdrawn from your bank account each month. (You can do this easily through your bank either online or by phone.) You may even want to set up a dedicated checking account for your mortgage payments, and make arrangements with your employer to have a percentage of your income automatically deposited into the account each month.

Cecala offers one more tip: “If you run into problems making your mortgage payments, you probably want to avoid debt consolidation services. There are costs attached to them,” he says. “You’re generally always better off working with your loan servicer or a nonprofit that offers counseling and mortgage relief services.”

The Lowdown on Down Payments: Everything a Home Buyer Needs to Know

Ask most people what’s the biggest obstacle to buying a home, and hands down they’ll say it’s scraping together enough money for a down payment. But understand a key point: This is not a separate and distinct issue from landing a mortgage. 

Lenders, after all, like to see clients lay down a sizable chunk of change before they fork over a mortgage, because this shows you have skin in the game and lowers the odds that you’ll default on your loan. 

So how large a down payment do you really need?

Why a 20% down payment is best
Most financial planners recommend that home buyers make a down payment amounting to 20% of the price of the home.

Sure, that’s a lot of cash, which may explain why one survey by NerdWallet of 2,000 Americans found that we spend an average of three years shoring up our finances before buying a home. But there’s good reason to start pinching pennies early: A 20% down payment enables you to avoid paying private mortgage insurance.

What is private mortgage insurance?
If you have good credit and can put at least 10% down, you can still qualify for a conventional loan. The catch? You’ll need to pay private mortgage insurance, a premium that protects the lender in case you default on the loan. PMI ranges from about 0.3% to 1.15% of your home loan. But with interest rates being as low as they are, buying now can be a smart move from a long-term savings perspective.

“Mortgage insurance has gained a negative connotation, but it enables many people to buy homes who wouldn’t otherwise be able to,” says Barbara Carrollo-Loeffler, director of consumer and residential lending at Provident Bank.

Another silver lining: Once you have at least 20% equity in your home, you can ask your lender to cancel your PMI. And once you have 22% equity, the lender is required to automatically cancel the coverage. (One caveat: Some lenders require homeowners to get a home appraisal before they’ll remove it.)

Of course, purchasing a home now also means that you’ll start gaining equity in the home, rather than continuing to burn money on rent. You can use realtor.com®’s Rent or Buy calculator to see how much you’ll save each month.

Don’t have 20% or even 10%? Here’s what to do
Don’t have that kind of cash lying around? You have options. Depending on your credit score and income, you could qualify for one of over 2,200 down payment assistance programs nationwide, which help out home buyers with low-interest loans, grants, and tax credits. While a certain portion is geared to low-income buyers, you don’t have to be down and out.

According to Jonathan Smoke, chief economist of realtor.com: “Most consumers do not know about these programs, and those that do assume it’s more difficult to get than it is.”

And the savings can be substantial: Home buyers who use down payment assistance programs save an average of $17,766 over the life of their loan, according to a report by RealtyTrac. But we’re talking even bigger cash in expensive housing markets such as Los Angeles, where the average down payment assistance is a handsome $40,598.

Another option is a government-backed mortgage, if you qualify. Federal Housing Administration loans let borrowers put down as little as 3.5%; if you or your spouse served in the military, you’re truly in luck: Veterans Affairs loans are available with 0% down. You’ll need to meet certain income and credit requirements—FHA loans call for a minimum credit score of 500, and VA loans require a minimum score of 620—but these loan programs could allow you to purchase a home with less than 20% down.

The downside to small down payments
While making a small down payment may seem dreamy, keep in mind that there are some drawbacks. For one, the amount of money you’re borrowing will obviously be larger, which means you’ll have to make larger monthly mortgage payments. Making matters worse, loans with down payments under 20% typically come with higher interest rates. Therefore, you’ll need to tighten your spending more than if you were making a 20% down payment, but that’s not necessarily a bad thing if it enables you to clinch the keys to a home now, is it?

To get a ballpark figure of the mortgage you can afford and how your down payment affects your finances, punch your salary and other numbers into a home affordability calculator.

Compromise Isn't Always Key

Before Buying, Real Estate Pros Insist on Doing These 4 Things

One house you’re looking at has the wraparound porch you’ve fantasized about, but it’s on a high-traffic street. The condo you like has a doorman in the lobby (you can order online now!), but it has no dedicated parking. What to choose?

It’s not every day that you buy a home and make decisions about the next three, five, or 10 years of your life. Since you can’t exactly take a home on a test drive, how do you decide? That got us to thinking about real estate pros. When they’ve seen practically everything on the market, how do they choose?

Four pros who’ve seen it all share their advice and their stories of hunting for just the right home.

Compromise for Your Priorities

Veteran real estate agent Nancy Farkas knew exactly what she wanted in her home: ranch style, three bedrooms, high ceilings. But you know what she bought? A two-story Colonial.

Huh?

For Farkas, an associate partner with Coldwell Banker Heritage REALTORS®, in Dayton, Ohio, the home’s location and price trumped style. “I had a dog I had to go home and walk at noon, and the house was close [to work] and the right price,” she says.

Her advice: Make sure your practical and functional priorities don’t get lost in all the home buying hoo-ha (sparkling granite counters, new hardwood floors, a steam shower!). Remember, you can always add the hoo-ha, but you can’t make a home fit all priorities, such as location and price.

Dig Into the Details (Dull, Yes, But Worth It!)

When Grigory Pekarsky, co-owner and managing broker with Vesta Preferred Real Estate in Chicago, was looking for his first home, one of his priorities was to minimize his maintenance costs. He made sure to find out if the house had a newer roof, good siding, and a newer furnace. But he recommends you go even deeper to uncover a home’s not-so-obvious maintenance costs:

• Scope out the sewer line - especially if you’re interested in an older home — to make sure there aren’t any tree branches or other debris clogging up the works. Otherwise, you might find some nasty sludge in the basement.
• Look at the trees. How mature are they? Roots from older trees can invade the sewer line; untrimmed branches can pummel your gutters during storms.
• Know what's not covered by homeowners insurance.“I learned seepage isn’t covered. Shame on me,” he says.
• Ask how old the appliances are.You might need to budget for something new in a few years. Sellers are only required to fix what the inspector finds is broken; they’re not going to upgrade working appliances for you.

Seek a House That Matches Your Lifestyle

Having lived the high-rise apartment life as a renter, Pekarsky knew a single-family home was just what he wanted. He was tired of living in a relatively small space with no yard. He wanted a house he could “grow into in the next three to five years.” That meant multiple bedrooms and bathrooms for the family he plans on having. So what he bought — a three-story, single-family with a finished attic bedroom (shown below) on Chicago’s North Side — suits his lifestyle perfectly.

In addition, “you get the biggest value from owning the land,” he says. “In a single-family [home], people aren’t telling you what to do with the investment.”

On the other hand, Matt Difanis wished he’d bought a condo when he bought his first home, a small bungalow ranch in a charming, historic neighborhood in Champaign, Ill. It was first-home love — until it rained.

“If I didn’t clean out the gutters before every rainstorm, the basement would leak,” says the broker-owner of RE/MAX Realty Associates in Champaign. He didn’t realize that taking care of a single-family home wouldn’t be his cup of tea. “I should have opted for a condo without gutters to clean and a lawn to mow,” he says.

Agent Amy Smythe Harris of Urban Provision REALTORS®, in Woodland, Texas, bought a home with a sizable downstairs suite her parents could use now (and she could use years from now). She says her millennial clients aren’t forward-thinking about their lifestyles. Some are childless and say they don’t care about schools, pools, and tennis courts. Then they become parents a few years later and have to move.

“Once they have kids, the first question [they] ask is about school districts, and the second is about where the parks and pools are,” she says.

The pros’ bottom-line advice: Think of your lifestyle preferences and how those might change in the next few years. After all, the typical homeowner lives in a house for a median of 10 years before selling, NATIONAL ASSOCIATION OF REALTORS® data shows.

Look at the House Through the Lens of Resale

All the real estate pros we talked to — no surprise here — emphasized resale. Take appraiser Michelle C. Bradley of Czekalski Real Estate Inc. in Natrona Heights, Pa. When she built her current home — a 2,200-square-foot ranch — she included a full, unfinished basement, even though she has no use for one and rarely ventures into it.

Why would she do that? Because basements are standard in her southwest Pennsylvania market. But Bradley’s not going to finish the basement until she’s ready to sell. That way, she avoids having to clean it and ensures she’ll install the most fashionable bathroom fixtures at sell time.

Her advice: “Don’t buy or build something unique that you can’t resell. If you’re not in an area with log homes, don’t choose a log home. If you’re not in an area with dome homes, don’t choose a dome home.”

Likewise, don't buy a home that's not in line with the neighborhood's average price. When you go to resell, you'll find yourself in an uphill battle to maintain your higher price.

Other advice from the pros: Watch out for unfixable flaws that could affect resale, like:

• What's next to the home, such as vacant land that could be developed, high-traffic businesses, noisy power generation stations, a cell tower, etc.
• Lot issues, such as a steep driveway that could double as a ski slope in winter, or a sloped yard that sends water special delivery to your foundation.

Of course, a home isn’t just about resale. It’s just one factor to consider. Remember the first point: Be willing to compromise for your priorities. If the home meets your priorities and you’re going to stay there awhile, then resale might be where you compromise.

Common Home Buyer Experiences

7 Helpful Tips for First-time Home Buyers

Looking for a new home can be a pretty exciting task. With that much money on the line, it's worthwhile to read up on the process before you set out. Unnecessary mistakes can and should be avoided while trying to get the best deal for your money. As a first-time home buyer, proper guidance from seasoned professionals can make all the difference.

Here are a few tips first-time buyers can take when trying to find their first home:

Get clear on what you want – This is the most important part of your preparation. You are about to enter a shopping experience that is unlike any other. At times, it can be stressful and difficult. 

There is a lot of money on the line and a big commitment to be made, so prepare accordingly. Get clear on what you really want and what you are willing to compromise on. This will make your home shopping experience much more efficient and will give you a map to go off of should tensions run high. 

Take a look at this guide to buying your first home, which might help you narrow down your wants vs. needs. The better prepared you are, the better chance of having a smooth transaction.

Do your research – Home shoppers today are more empowered than ever before. You have so much information at your fingertips. Go online and find the areas you want to live in. Narrow down the neighborhoods you want to consider to three or four, and focus on those. Learn about the cost of the things you really want and the cost of the things you can do without. The more knowledgeable you are the better you will be at negotiating a good deal.

Talk to the bank – Preparing to get a mortgage in advance of your actual purchase will be super important.

Before you start looking at houses you should have a discussion with your lender. The lender will be able to give you an honest assessment of what your finances look like, how much house you can afford and what your rates will be. You want to know all of this – what it will really cost you – before you start looking at homes you can't actually afford. Find out what your monthly payment will be at different amounts and determine what your personal limits are as well. Depending on your credit, the lender may be willing to give you far more than you need. Once you know the time is right to buy a home make sure you get pre-approved by a lender. Make sure you understand the difference between getting pre-approved and pre-qualified for a mortgage. Without a doubt you will want to get pre-approved as a pre-qualification letter is not worth much. A savvy REALTOR® representing a homeowner will pick up on this right away. If you are competing with other buyers and are not financially prepared, you could lose out on your dream home!

Think about the future – Is this going to be a starter house that you will move out of in five years? Is it going to be a property that you fix up and flip? Is it going to be the home for your new family that you will be in for 10 or 20 years? Your long term plans will help dictate your purchasing choices. It is important to understand what you really want this home for before you go and sign any papers and spend any money. One of the biggest mistakes first-time home buyers make is not thinking about their long term plans.

Find a good REALTOR®– A real estate agent can prove invaluable when shopping for a home. If you find one that is good – an agent that is finding people the homes they want at a price they are happy with – then much of the work will be done for you. The agent will talk about what you want, will run you through much of the above mentioned areas and will help you find the houses that are really what you are looking for. The agent will also be an effective negotiator, meaning that you will probably get more house for your money than if you went at it alone.

Set a timeline – The situation you are in is uniquely your own. You want to set a timeline for when you will find and buy a home – a timeline that reflects your realities. If you have bad credit that needs to be cleaned up first, for instance, you will need to spend some time working on that before you actually start house hunting. If you need to move right now, that is another factor in your timeline. Give yourself some restrictions so you will be encouraged to move at a steady pace and get the job done. Hunting for a house can be quite stressful and it is not something that should be drawn out any more than necessary. Determine what you want, work with a REALTOR®, and get it as efficiently as possible.

Understand your fiscal responsibility - Another problem that first-time home buyers don't always properly think through is the financial responsibility of owning a home. A large amount of buyers will think about making their mortgage payments and nothing else. If you have been renting for a while, or even living with mom and dad, it is easy to see why this can happen.

Unfortunately, owning a home comes with quite a few more additional first-time home expenses that you may not have considered such as appliances, furniture, and even taxes and insurance. These are all important things to consider when putting together your homebuying budget.

Use all of the above tips for finding your first home and you will be well on your way to enjoying your new life as a homeowner!