How Being Late on Monthly Payments Can Affect Your Refinance

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Refinancing your mortgage means paying off your current loan with a new loan. While you might stand to save money on the deal, or even take cash out of your home’s equity, the lender takes a risk. If the loan amount is higher than your current loan, the risk is the highest. If the loan amount remains the same, the new lender still wants to know that you are a good risk.

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If you have late monthly payments on your current loan, this could serve as a ‘bad sign’ to the lender. They may not be willing to lend you the money because you pay your mortgage on time. Of course, there are exceptions to the rule, which we will discuss below.

Looking Back 12 Months

Generally, lenders go back 12 months to see how you make your mortgage payments. If you make them late during that time, you could find it difficult to refinance. Of course, this depends on the lender and the chosen program.

  • Conventional loans – Require a 12-month history of on-time payments. Some lenders may grant an exception for one 30-day late payment if it was more than three months ago and if it was due to circumstances outside of your control.
  • FHA loans – If you refinance from an FHA loan into another FHA loan with the streamline program, you may be allowed one 30-day late payment as long as it occurred more than 3 months ago. This will depend on the lender, though, as some lenders require a perfect 12-month payment history.
  • VA loans – The VA also offers a streamlined program that allows veterans to refinance from a VA loan into another VA loan with very little verification. The VA relies on a timely mortgage payment history for approval of this loan. With the right compensating factors, one 30-day late payment may be allowed, but it’s highly frowned upon.

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The Combination of Factors

Luckily, you don’t have to rely strictly on your mortgage payment history in order to secure approval to refinance. Lenders put all of your factors together to determine if you qualify for the loan. In cases like the VA or FHA streamline loan, heavy emphasis is placed on the timeliness of your mortgage payments. If you have more than one late payment, you will not be able to refinance.

If you are looking for a fully verified program, though, you may be able to get around late payments with other qualifying factors. For example, you may be able to show that you have adequate reserves on hand that will help you stay on track with paying your mortgage. You can also prove to the lender that you paid your mortgage late because of circumstances you could not control. For example, if your company closed, there wasn’t much you could do. If you have since bounced back from the situation and are back on financial track, the lender could take that into consideration.

The more compensating factors you have beyond what the lender requires, the more likely it is that you’ll get approved for the loan you want. Try focusing on your credit score, liquid assets, and debt ratio. The higher your credit score, the lower your debt ratio, and the more assets you have on hand, the better your chances of approval with or without late payments..

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