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If you're behind on your monthly mortgage payments, you're not alone. According to the Mortgage Bankers Association, delinquency rates ticked up to 3.62% in the third quarter of 2023, indicating many homeowners are facing financial challenges.
Refinancing your mortgage is one option to lower your monthly payments and reduce the strain on your budget. When you refinance, you replace your existing mortgage with another one with a different interest rate and loan term. Proceeds from your new loan are used to pay off the old loan.
Refinancing could allow you to change your loan terms, ideally for more favorable ones. Late mortgage payments can make refinancing difficult, but not impossible. Here's what you need to know about refinancing your mortgage with late payments.
Can You Refinance With Late Mortgage Payments?
Yes, you may be able to refinance your mortgage even if you're behind on payments, but it may depend on the type of home loan you have, your creditworthiness, income, employment history and other factors. Qualifying for refinancing will likely be tougher if your late payments are recent and for a significant amount.
Whether or not you can refinance with late payments will also largely depend on the type of home loan you have. Here are some guidelines of what you might expect with some of the most common mortgage types.
Conventional Mortgage Refinance
If you have a conventional loan, which isn't backed by the federal government, you may qualify to refinance your mortgage if you meet the following Fannie Mae guidelines:
- Your loan must be current when you apply, with no more than 45 days since your last installment payment.
- Your mortgage must not have any payments late by 60 days or more in the 12 months before your credit report is pulled.
FHA Refinances
Federal Housing Administration (FHA) loans are a popular mortgage option among borrowers because they have lower credit score and down payment requirements than conventional loans. This leniency also extends to late payments. Here are the agency's guidelines:
- FHA simple refinance: This refinancing option may allow you to change the rate and terms of your loan to lower your monthly mortgage payments. To qualify, you must be current on your loan payments for the six months prior to your refinance application. You'll also need a professional appraisal to determine your home's value.
- FHA streamline refinance: This rate-and-term refinance option differs from the simple refinance in that you don't need an appraisal or a credit report check. Again, you must be current on your monthly mortgage payment, with no 30-day-late payments (or longer) within the past six months and no late payments longer than 30 days within the past 12 months. If your original loan is newer, it must be "seasoned," meaning you've had the loan for at least 210 days since closing and made six on-time monthly payments.
VA Streamline Refinance
Veterans Affairs (VA) home loans can be refinanced through a VA interest rate reduction refinancing loan (IRRRL), also known as a VA streamline refinance. According to the VA, you can refinance loans 30 days or more past due, but your application must be submitted for approval beforehand. Your new loan may include your late payments, charges and "reasonable costs" if loan termination is already underway.
In addition to the VA's requirements, individual lenders often set their own eligibility requirements. For example, Veterans United's IRRRL requirements stipulate that you can't have any 30-day-late payments within the past 12 months on the loan you wish to refinance.
USDA Streamlined Assist Refinance
The United States Department of Agriculture (USDA) offers three refinancing plans for homeowners with existing USDA loans. These plans allow you to refinance with low or no equity and don't require a credit check. However, you must be current on your payments. Here are the late-payment guidelines for USDA's refinancing plans:
- USDA streamlined and non-streamlined: No late payments (more than 29 days overdue) for 180 days before applying for USDA refinance
- USDA Streamlined Assist: No late payments for 12 months prior to requesting to refinance
If you're currently behind on your payments, you may need to catch up and wait at least 180 days without a late payment before applying.
What Can Disqualify You From Refinancing?
Before applying for a refinance, make sure you're putting your best foot forward by addressing any issues that may lead to a loan denial, including the following:
High Debt
Carrying too much debt is one of the primary reasons lenders reject refinance applications. Lenders consider your debt-to-income ratio (DTI), which is the percentage of your total monthly income dedicated to your debt payments. Generally, lenders look for DTIs below 43%, but the lower, the better: Many look for ratios below 36%. You may find more leniency if refinancing a government-backed loan, with some lenders accepting higher DTIs of up to 45%.
Low Credit Score
You'll likely need to meet a minimum credit score requirement to qualify for refinancing. Requirements can vary depending on the refinancing option you choose, such as:
- Conventional loan refinance: 620 minimum credit score
- Jumbo loan refinance: 700 minimum credit score
- FHA loan refinance: 580 minimum credit score
- VA loan refinance: 580 minimum credit score
- USDA loan refinance: USDA doesn't have a minimum credit score requirement, but lenders typically look for a score of at least 620
Too Many Late Payments
Regardless of your credit score, debt load and home equity, some lenders may deny your refinance if you have too many late mortgage payments. For example, some VA lenders won't refinance your loan even though the VA guidelines permit refinancing loans that are 30 days or more past due with prior approval.
Insufficient Home Equity
Generally, lenders require you to have at least 20% in home equity to qualify for refinancing. However, your mileage may vary among lenders, with some requiring as little as 5% home equity. Government-backed refinance programs tend to have lower home equity requirements.
- Conventional refinance: 20% minimum home equity
- FHA streamline refinance: No minimum equity (but may need 20% equity for cash-out refinances)
- VA refinance: No minimum home equity
- USDA streamline refinance: Low or no home equity
Low Income or Unstable Employment
Lenders review your income and employment status to gauge your ability to make timely payments on a new home loan. Consequently, they may deny your refinance application if your employment history is spotty or if your income is deemed too low to meet your monthly obligations, including your mortgage. If you've recently been out of work or changed jobs, a lender may want you to provide your income history for two years.
What to Do if You're Behind on Mortgage Payments
Contact your lender immediately to discuss your options if you're not current on your payments. It's wise to be proactive and consider options to improve your situation or limit the negative effects of late payments, such as:
Apply for a Rate-and-Term Refinance
Refinancing your mortgage to lower your payment could make your mortgage more manageable. This strategy may be an option if you have at least 20% equity in your home. However, you may qualify with some lenders with less equity, especially if you're refinancing a government-backed loan. If you're behind on your mortgage payments, consider working with an independent loan agent who works with multiple loan providers, including those who work with borrowers with late payments or bad credit.
Request a Mortgage Forbearance
If you're experiencing a loss of income or temporary hardship, consider requesting a mortgage forbearance, which can lower or pause your mortgage payments for up to 12 months. Additionally, lenders don't typically initiate foreclosure proceedings during a forbearance period. Once forbearance ends, you'll have to catch up on any missed or paused payments, usually through a lump-sum payment or a repayment plan.
Ask Your Lender for a Mortgage Modification
Unlike a refinance, which involves taking out a new loan, a mortgage modification adjusts the terms of your existing loan to make it more affordable. If your lender agrees to a modification, they may reduce your interest rate or extend your loan term to bring down your loan payment amount. Keep in mind, a longer term means you'll make more payments, which could cost you more in interest over time.
A loan modification could help you become current on your mortgage payments. To qualify, your lender may request that you fill out a hardship form to gain a better understanding of your circumstances.
Frequently Asked Questions
Lenders typically require a minimum credit score of at least 620 to refinance a conventional loan or 700 to refinance jumbo loans. Government-backed loans may have more lenient credit score requirements, such as a minimum 580 score for FHA and VA loans. Remember, however, that lenders typically set their own credit guidelines, aside from FHA and VA recommendations.
The number of payments you must make before refinancing varies depending on your original loan terms and the type of refinancing you want. Many conventional loans can be refinanced immediately after closing. By contrast, an FHA streamline refinance requires at least six months of timely payments and at least seven months to pass from your closing date before you can refinance.
You don't actually skip a payment when you refinance a mortgage, although it may appear that way. Remember, your original loan is completely paid off at closing. So, if your loan closes in the middle of the month, you've already paid on your loan up to the closing date. Your new loan begins accruing costs the day after closing, so there's no break in charges.
The first payment on your new loan is usually due about 45 days after closing, so it may seem like you're getting to skip a payment, but you're still accountable for the charges. Essentially, your payment cycle adjusts, but you're not missing a payment.
Contact your mortgage broker and loan servicer for details to make sure you don't miss a payment and potentially jeopardize your closing and credit score.
The Bottom Line
If you're behind on your mortgage payments, reach out to your home loan servicer as soon as possible to explore options to help you avoid negative consequences, including late fees or foreclosure. Potential options may include refinancing your loan, getting a loan forbearance or a loan modification. Also, consider consulting a loan broker who works with multiple lenders to see if a lender would work with you to make your loan more manageable.
While you're at it, keep an eye on your credit with free credit monitoring from Experian. You'll receive real-time alerts about new inquiries and changes in your personal information. Credit monitoring also allows you to stay up to date about credit report changes with updates every 30 days.