The one trick to never being mortgage-delinquent
Mortgage delinquencies are on the rise, and markets are worried.
A new study shows that about 1% of people aren’t making their mortgage payments on time. This is a far cry from crisis levels. But what if delinquency numbers go up?
Not paying your mortgage can mean late fees, ruined credit, and at the extreme end, foreclosure.
But there’s one big thing you can do to avoid delinquency issues: Make sure you have an affordable mortgage.
Get pre-approved, compare lenders to find the lowest rates and fees, and remember — you’re not required to spend your whole budget. A smaller home loan means lower monthly payments.
Ready to find a budget-friendly mortgage? Get started here.
What does it mean to be mortgage “delinquent”?
When you buy a home with a mortgage loan, it’s important to pay that mortgage on time every month. Not doing so is called a “mortgage delinquency.” And delinquency can have serious consequences — the worst one being losing your home.
A new study indicates that first-time home buyers are having more mortgage delinquency problems than they have since 2010. But there are ways home buyers can protect themselves from delinquency.
Whether you are thinking about buying your first home or purchasing another one, it’s crucial to find an affordable home loan.
Comparing lenders and rates to find the cheapest mortgage can protect you from committing to a loan you can’t afford month-to-month. When your mortgage fits your budget, you’re less likely to ever miss a payment.
New study says delinquency rates are up
Black Knight’s most recent Mortgage Monitor report had some alarming findings:
- Nearly 1% of mortgage loan originations in the first quarter of 2019 were delinquent six months after origination. That’s a 60% increase over the past two years and the highest since 2010
- The rise in early-stage purchase loan delinquencies was higher for first-time buyer loans than repeat buyer loans
So why are first-time home buyers struggling to make mortgage payments? According to Black Knight, it’s largely because credit scores are down, homes are more expensive, and debt-to-income ratios are rising as a result.
Why first-time buyers aren’t paying their mortgage on time
Daryl Fairweather, chief economist at Redfin, says she wasn’t surprised by many of these findings.
“There’s been a rise of younger buyers with multiple types of debt plus a lack of affordable inventory in many metro areas,” she says.
“The biggest group of first-time buyers right now is millennials. They are still navigating these large purchases amid burdens like student loan debt, credit card debt, and high costs of living in metro areas.”
These factors “can definitely create some financial challenges that would result in loan delinquencies,” says Fairweather.
Millennials “are still navigating these large purchases amid burdens like student loan debt, credit card debt, and high costs of living in metro areas.” —Daryl Fairweather, Chief economist, Redfin
Another problem? First-time owners often don’t foresee additional housing expenses.
“Many don’t anticipate repairs, maintenance, and unknown costs that are not visible while they are renting. I’ve personally experienced this with younger clients. And I’ve advised them that they need cash reserves for the unexpected and in case they lose their jobs,” says Paul Miller, owner and CPA with Miller & Co.
First-time buyers might have a hard time budgeting for homeownership because increased competition puts pressure on to buy fast.
“Many first-time buyers feel pressure to compete and try and win an offer on a home. This can cause issues later when finally having to deal with new debt” —Andy Harris, President, Vantage Mortgage Group
“It’s important to have a clear idea of the costs and other factors that come into homeownership,” notes Andy Harris, president of Vantage Mortgage Group.
“Many first-time buyers feel pressure to compete and try and win an offer on a home. This can cause issues later when finally having to deal with new debt and repayment liability.”
Tips to avoid mortgage delinquency
Want to avoid mortgage delinquency? Start by carefully budgeting your finances.
Know what your monthly payments will be — not just for mortgage principal and interest but also for items like taxes, insurance, and HOA dies.
And keep extra cash in reserve for emergencies. You never know when big-ticket items like roof repairs or maintenance issues will pop up.
Automated mortgage payments can protect homeowners from making a late mortgage payment — or worse, missing one
“I also highly recommend using an automated payment system for your monthly mortgage. This can protect you from paying late,” suggests Miller.
Most lenders will allow you to set up scheduled payments. This way, your monthly mortgage amount is automatically paid via your bank account at the same time each month.
How to know when you’re ready to buy
If you’re thinking about purchasing a home but are worried about affording the monthly payments, that begs a question:
Is it the right time to buy and own a home?
“First-time buyers need to have a significant money cushion. This means at least six months of income saved up. That’s especially true if you feel uneasy about your job security,” recommends Fairweather.
Experts recommend a savings fund with at least six months’ income before considering buying a home.
She says a good candidate for buying is someone with a stable source of income and healthy savings who has a solid financial plan in place to pay off the home.
Questions to ask yourself before signing on for a mortgage:
- Have I consistently made rent payments on time?
- How much mortgage can I comfortably afford on my monthly budget?
- If I stop earning money today, could I afford to pay for that house for up to six months without income?
“If the answer is no, wait until you’ve built a bit of a cushion for yourself,” advises Jeremy Sopko, CEO of Nations Lending.
And if you’re a repeat home shopper, follow the same advice.
“If you’re feeling even a little uneasy about the payments you’ll need to make, maybe it’s time to consider downsizing to a more affordable property,” Fairweather says.
What happens when you don’t pay on time
Mortgage delinquency can have serious penalties. And the consequences get worse the longer your payments are delayed.
Potential consequences of mortgage delinquency include:
- Late fees, which can be hundreds of dollars
- Credit score drops, which can impact all future financing
- Bankruptcy and foreclosure, in serious cases
“The short-term impact is you’ll be hit with late fees. These can amount to hundreds of extra dollars, putting you in an even deeper hole,” says Sopko.
Also, you’ll see a drop in your credit score.
“That will impact all your future borrowings,” Miller cautions. “Whether you want to lease a car or open another credit card, your ability to do so will be impacted by a lower credit score.”
The long-term impact could include bankruptcy and loss of your home through foreclosure.
“You could be sued or go bankrupt. And if your home gets foreclosed on, that could hurt your credit score for years to come,” adds Fairweather.
How many months to foreclosure?
The good news is that most lenders give you a 15-day grace period on mortgage payments, which are typically due on the first of the month.
“If you go beyond the 15th, there is often a 5% late fee penalty. If you are late 30 days, that gets reported to the credit agencies and causes problems,” says Harris.
“When you hit the 90-day unpaid mark, the lender will begin a Notice of Default. This will demand a set date to get your loan current. If you don’t meet this date, it could start foreclosure proceedings.”
Your next steps
Even though delinquency rates have seen a slight uptick, lots of people are still getting affordable financing.
Rates remain at historically low levels. And if you can find a bargain interest rate, you’ll get a lower monthly mortgage payment.
Start your search for affordable home financing here.