home financing

Shopping for a new home is one of the most exciting and stressful life events. While it’s certainly fun to check out the different houses and imagine yourself living in them, at the same time, finding that “perfect” house can be daunting, time-consuming, at times disappointing, and downright stressful. Of course, the best way to ensure the process goes smoothly is to be specific in what you’re looking for, the budget you are working with, and what you will and will not accept. 

With that said, here’s a look at red flags you will want to be aware of before making an offer on a home.

A Lot of Homes for Sale in the Neighborhood

While it may seem like a jackpot that there are so many homes to choose from in a particular neighborhood, this can also be a red flag. Why the mass exodus, what is prompting everyone to sell at the same time? Sure it could be totally harmless and nothing to the story at all, but at the same time, it’s worth a little investigating and asking questions. This is when it can be helpful to work with a realtor, as they can offer some insight.

The Home Is in Need of Major Repairs

While there are certainly those that don’t shy away from a DIY challenge, other buyers want to be able to move in and have things relatively ready to go. If there are massive repairs needed, then you’re going to need a budget to get it done. Some of the most costly projects can include new windows, a new roof, foundation issues, and a new furnace.

Is There Lead Paint in the House?

If you’ve been looking at older homes and they tend to fit your personal style a little better, then you’ll need to be hyper-aware of the potential of lead paint in the home. Basically, any of the houses built before 1978 here in the United States would have contained at least traces of lead in the paint that was used. Lead-based paints were the norm back then, but now people know much better.

Today, people realize just how hazardous this substance is to have in the house and as zotapro.com points out, that it needs to be removed properly, safely, and professionally. While it can certainly be remedied and the house will be made safe to live in, it’s something you at least need to be aware of since it will be a priority to get done.

Signs There Is an Infestation of Pests

Another red flag is a sign the house has an infestation problem. That could be an issue with bugs, rodents, or any other type of pest. It will then become your problem and your expense and trouble to get rid of them and repair any damage that may have been caused. 

Go Into the Deal Well-Informed

Keep in mind what is a red flag for some may not be for you. It’s all about being aware of the situation you are entering so that there are no surprises after the fact.

Previously successful people have had to declare bankruptcy, and gotten bankruptcy loans, recently because of COVID-19.

Restaurants and bars are prime examples, but many other companies like Gold’s Gym, Hertz,  GNC and Chuck E. Cheese to name a few have had to invoke bankruptcy protection with bankruptcy loans. 

Many of these filings were under Chapter 11 of the U.S. Bankruptcy Code. Chapter 11 allows companies to restructure their debts, formulate a survival plan, and continue to operate. If there is no hope of continued operation, one alternative is to file under Chapter 7. A Chapter 7 filing invokes a liquidation process that disposes of the company’s assets while dividing the proceeds among creditors.

If you have a business and you did not sign for anything personally, you could possibly avoid any personal credit issues since the business entity would have been responsible for all debts.

As most small business owners understand, however, it’s very difficult for a new business to operate without signing for something personally whether it’s a lease, a bank loan, or even a guaranty to a food supplier. Therefore, even if your business files for bankruptcy, anything you have personally signed for will quickly become your personal responsibility. Worse, any taxes owed by the business may be assessed to the officers and directors, and these taxes are usually not dischargeable in bankruptcy

The Struggle Continues with Bankruptcy Loans

In other situations, a consumer may have lost their job and this can result in bills due that just cannot be paid. Even with COVID-19 relief provisions that have staved off some rent and mortgage payments, some unfortunate individuals are being crushed under the weight of debt because their cash flow has been seriously restricted.

This is another reason that some of those affected by COVID-19 have had to declare bankruptcy.

Not Financial Death

In previous times, personal bankruptcy used to be considered. financial death, but this is no longer the case. There is life after bankruptcy, as The Moran Law Group explains: “Damaged credit improves over time, just like wounds heal. A credit report is not like a wine glass that once it’s broken, it’s gone forever.” 

Important note: For example, if you are going to declare bankruptcy in Kentucky, or Illinois, or any other state for that matter, make sure you do it right. Consult with a bankruptcy attorney before you file to make sure that everything that can be discharged is actually discharged.

No Scarlet Letter for Bankruptcy Loans

No one is going to know you filed bankruptcy by just looking at you, and if you do things correctly, you may be able to still live in your home.

State vs. Federal Exemptions

Different states have different bankruptcy exemptions, i.e. the list of items that can’t be attached or taken by creditors. Check out this chart to view the top five exemptions under Texas law, for example, compared to federal law.  This chart is courtesy of the  National Bankruptcy Forum:

What Now?

If you have declared bankruptcy, these are the important things you need to do now to begin your recovery.

Credit Cards

Before debit cards became so popular, newly bankrupt individuals worried that they would not be able to get a plane ticket without a credit card. This is not true now, as a debit card can be used to purchase plane tickets. Unfortunately, credit cards are necessary for some transactions, like car rental—even though Hertz is in Chapter 11 bankruptcy itself—and you’ll need to get a card.

Luckily, newly bankrupt persons can apply for a secured credit card that works like a regular credit card except that you have to guaranty your card with a cash deposit. This is valuable it because you will have started to rebuild your credit as new on time payments will be reported to credit bureaus.

Another good strategy is to ask a relative to add you as a user on one of their credit card accounts. That way, you’ll have a fresh line of credit and again, on-time payments will help raise your score.

Vehicle

If you owed money on your vehicle, it could be repossessed during the bankruptcy. Either let that happen or talk to your lender about other possibilities. You may be able to refinance the old loan with a cosigner, and there are other ways that a lender may help allow you to stay in your vehicle. If nothing else, make sure you find some reliable transportation—even a used beater that runs may be better than taking the bus.

Utilities

Your local electric company will automatically discharge your old bill, but you may have to come up with a small deposit to continue service. Consider using a cosigner for the account if utility companies are giving you trouble.

Applying for a New Job

Smaller employers may not care about your credit score, but larger ones regularly access credit reports, and a fresh bankruptcy could cause some employers to think twice about your application. Therefore, make sure you engage the services of a quality recruiter along with a professional resume writer to help ensure that you won’t be automatically rejected because of bad credit.

Invoke Sympathy

You just declared bankruptcy. You’re emotionally devasted. Use this as leverage to keep lingering creditors from bothering you. If you owe money to the IRS, contact them and ask for some time to get your finances in order. A 120-day hold on your account can be welcome, and you can use that time to regroup.

If you have unfortunately lost your home and have to rent an apartment, consider renting from a landlord you can talk to personally, rather than a property management company that might automatically reject you. If you can explain your situation directly to a landlord, you might be given a chance you wouldn’t otherwise be afforded. 

Personal bankruptcy is not to be taken lightly, but it’s not the end of the world. Many people that declared bankruptcy during the Great Recession that began in 2008 are now homeowners. Yes, bankruptcy is a financial setback, but with diligence and hard work, you can overcome any short-term issues that it creates.

These are scary times, and if you have lost your job, taken a pay cut, or have been placed on even a temporary furlough, making your monthly mortgage payment can be tough. Any financial advisor will tell you that even one 30-day late mortgage payment will destroy your credit score and seriously hinder your chances of buying a property in the future. Luckily, the recently passed CARES Act offers at least temporary relief under certain circumstances.

Federally Backed Loans

Many mortgage loans are backed, securitized and/or purchased by one of the following federal agencies:

•     Fannie Mae
•     Freddie Mac
•     Federal Housing Administration (FHA)
•     U.S. Department of Veterans Affairs (VA)
•     U.S. Department of Agriculture (USDA)

If your home loan fits into one of the above categories, you’re eligible for forbearance. Our friends at Nolo tell us:

“Under forbearance, your loan payments are postponed or reduced, but interest continues to accrue during the period of forbearance.”

The CARES Act allows you to request mortgage forbearance for up to 180 days and this request, according to the law, shall be granted. You can then ask for an additional 180 days if you make the request before the end of the first forbearance period. At the end of the forbearance period—whether it is 90 days or 360—you have choices. Rocket Mortgage, for example, explains what they offer after forbearance has ended:

• With a repayment plan, we’ll add part of your past-due amount to your regular mortgage payment each month.
• With a deferral or partial claim, we’ll set all or part of your past-due amount aside to be paid later. It will be due when you pay off your mortgage, sell your home or refinance. You won’t be charged any interest on the deferred balance.
• With a loan modification, we’ll modify the terms of your existing loan to include your past-due payments.

As you can see, if you can’t make your monthly mortgage payment, the CARES Act does give you some great options.

No Negative Credit Reporting

Federal student loans come with built-in forbearance opportunities. While the rules have changed in recent years, forbearance is usually granted upon request and there are no negative credit report or credit score issues. 

A homeowner could always request forbearance from a lender because of financial hardship, and lenders were picky about granting relief. Furthermore, before COVID-19, any granted mortgage forbearance would be negatively reported to credit bureaus and credit scores would take a serious hit.

In these COVID-19 times, this is no longer the case, as the CARES act specifically prohibits any lender from negatively reporting a COVID-19 related forbearance.

Why Not Ask for Forbearance?

The HUD factsheet entitled CARES Act Forbearance Fact Sheet for Borrowers with FHA, VA, or USDA Loans, explicitly states that:

“For loans insured or guaranteed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Rural Housing Service (RHS), The CARES Act provides a mortgage payment forbearance option for all borrowers who, either directly or indirectly, suffer a financial hardship due to the novel coronavirus (COVID-19)national emergency. No documentation is required to prove your hardship beyond your assertion that you are suffering from such a hardship. However, if you can still make your mortgage payments, you should continue to do so.”

And even if your loan is not included in the categories previously listed, many lenders will still work with you to grant some type of payment relief. With no hit to your credit score and little required financial hardship documentation, why just use the forbearance option and quit making mortgage payments for a year?

Interest Accrues and Payments are Still Owed

One issue with forbearance is that mortgage interest still accrues. So, if you have a new $300,000 mortgage at 4.5 percent, over $1000 of your monthly payment during your first year will be credited toward interest. If you don’t make those payments that interest still accrues. And at that end of your forbearance, you also owe every payment amount you have missed.

If you have a big mortgage and a big house, your principal and interest might be $4000 per month. If you are allowed to miss 12 payments, you will have increased your balance due by close to $50,000 when the forbearance ends. 

If you have lost your job because of COVID-19 and you can’t make your mortgage payments, CARES Act forbearance can be a great help as you restructure your financial life. If you have just taken a small hit due to the coronavirus and you are able to make your payments, think twice about the effects a forbearance might have on your current mortgage. 

While it might be great to be mortgage payment free for 12 months, realizing that you have just added over $50,000 to your loan amount may not be as comforting.

Mortgage rates have been what some may call artificially low since the Great Recession that began in 2008.

Check out this chart from Freddie Mac and you’ll see that average mortgage rates —t hat topped out at a breathtaking 18.48 percent in January of 1982 — have been below five percent since early 2010. Since then, these low rates have meant a huge increase in buying power for those seeking homes. 

You’ll see some more recent information in the image below.

image via themortgagereport.com

For example, a $350,000 loan at five percent would cost $1,879 per month (principal and interest), while that same loan at four percent would cost $208 dollars less per month. That’s more than a 10 percent payment decrease.

Coronavirus Effects on Mortgage Rates

The pandemic caused an unprecedented near-total forced economic shutdown, and the U.S. government responded with a massive dose of liquidity that included individual stimulus checks, expanded unemployment benefits, forgivable Payroll Protection Program loans, and help from the Federal Reserve in the form of lowered interest rates. This caused mortgage rates to fall below three percent in some cases, further extending buying power. 

Higher Credit Scores Needed

While three percent interest rates are a great incentive to home buyers, these coronavirus mortgage rates can be more difficult to attain since many lenders quickly pivoted to recession-mode and subsequently raised minimum credit score requirements.

Bankrate.com tells us:

“Wells Fargo and US Bank both adjusted their minimum score requirement to 680 (including for FHA and VA loans, which typically feature lower credit-score requirements as low as 580), while Flagstar Bank upped its minimum to 640.”

While buyers can carefully check their credit reports for errors and correct them in order to boost their scores, this fix will not work for those that have legitimate credit issues, and therefore many buyers may be unable to avail themselves of these historically low rates.

Consider a 15-Year Term

Well-qualified buyers can get an amazing 2.87 percent rate for a 15-year mortgage. 15-year coronavirus mortgage rates will mean a higher monthly mortgage payment initially, but the entire loan would be retired in 15 years.

If buyers can qualify for and afford a 15-year mortgage, it’s definitely an option to seriously consider. It might also be something to consider, if you’re thinking about selling a house after 1 year. 

Refinancing an Existing Loan

Those that bought homes with loans with pre-coronavirus mortgage rates of four percent or more might consider refinancing their current loans. A person with a $350,000 mortgage currently at four percent can save a not insignificant $195 per month if a three percent rate can be secured.

Even if there are some refinancing closing costs included, these can be overcome in a few years by factoring that almost $200 per month in savings.

Forbearance for Coronavirus Mortgage Rates

The Consumer Financial Protection Bureau succinctly explains options that are available to homeowners that cannot make mortgage payments due to the pandemic:

“If you experience financial hardship due to the coronavirus pandemic, you have a right to request a forbearance for up to 180 days. You also have the right to request an extension for up to another 180 days. You must contact your loan servicer to request this forbearance. There will be no additional fees, penalties or additional interest (beyond scheduled amounts) added to your account. You do not need to submit additional documentation to qualify other than your claim to have a pandemic-related financial hardship.”

If you are having trouble making payments, you do have to take the first step and contact your loan servicer as mortgage forbearance is not automatic, so make sure that you proactively do this before you make a late payment.

Tighter Mortgage Lending Criteria

As we had mentioned previously, banks have tightened mortgage lending standards. For those with less than perfect credit, this can now be a problem. In good times, a credit blip or issue can sometimes be ignored, but in perilous times like these, one late payment can derail an otherwise solid mortgage loan application. 

If you did everything possible to nudge your credit score to 650 and now you find that the low coronavirus mortgage rates are still out of reach, you might want to consider some non-traditional financing options like contract for deed.

An MN contract for deed deal allows a third-party company like C4D, for example, to purchase a home from the seller and lease it back to you. When you have made all of the monthly payments, or if you are able to get conventional financing before the contract officially ends, the deed is given to you.

The stock market certainly seems to think that coronavirus troubles are behind us, and if true, mortgage interest rates could rise in the near to medium term. Therefore, if you can lock in one of these low rates now, you may be participating in a once in a lifetime financial opportunity.

You’ve seen the ads and commercials touting systems for buying homes with no money down. You may have even read this book:

“No money down” has been the catchphrase for years as people to find a no money down mortgage through loan platforms that range from conventional lending to rent to own and contract for deed. And depending upon your situation, you can buy a home with no money down. First, let’s look at the more conventional ways to get that done, and we’ll follow with some alternative methods.

VA Loan

If you are a military service veteran, you may be eligible for the buyer-friendly VA loan program. According to the VA site:

“VA Home Loans are provided by private lenders, such as banks and mortgage companies. VA guarantees a portion of the loan, enabling the lender to provide you with more favorable terms.” 

It’s really better than that, however, because in addition to a true zero down-payment, some VA lenders will make mortgage loans to those with credit scores of 580 or even less. 

If you or your spouse are a military veteran, you really need to check this program out. And if you’re ever confused about any terminology, you can always reach out to a lawyer or find information and more here.

USDA No Money Down Mortgage

The U.S. Department of Agriculture will make you a no money down mortgage loan if you want to buy a home that is deemed rural or suburban. Amazingly, 97 percent of the country is in this category.

Check out this map provided to us by our friends at The Lenders Network:

Then, make sure that you meet these main requirements:

• Your total household income must be less than 115% of your area’s average.
• You need a credit score of 620 or better.
• You must not have any foreclosure or bankruptcy events going back two years.

If you are willing to buy in an approved area and your credit is decent, a USDA loan could be a great way to go. 

FHA First-Time Homebuyer Loan

FHA loans usually require a down-payment of three percent, but that down-payment can be gifted to you by someone else. Also, several states like Minnesota have programs that can assist with down-payments, and it is possible for you to borrow your down-payment or even get a grant to cover it.

Navy Federal Credit Union

This lending institution makes no money down mortgage loans. You may need good credit for this program, but it’s worth checking out even if you don’t.

Rent to Own

If you have no down-payment funds and are willing to work toward true homeownership over a longer period of time, you may be able to find a good rent to own situation. In this scenario, you rent a home and the owner agrees to apply a portion of your monthly rent to a down-payment. When you have accumulated a sufficient amount, the property owner will sell you the property—usually acting as the bank and becoming the mortgage holder. 

A rent to own contract is called an executory contract and is frowned upon in some states like Texas. There are perils and pitfalls for both sides, so make sure that you get competent legal advice before you enter into a rent to own agreement.

Seller Financing

There are situations where you can find a seller that owns their home free and clear. Since they don’t have a mortgage, they can sell the property to you for no money down if they choose.

These situations are very hard to find, but it’s not impossible. If you can find a free and clear property for sale and convince the seller that you are a good credit risk, it is possible that you could purchase a home for no money down.

Contract for Deed

Rocket Lawyer explains:

“Under a Contract for Deed, the buyer makes regular payments to the seller until the amount owed is paid in full or the buyer finds another means to pay off the balance. The seller retains legal title to the property until the balance is paid; the buyer gets legal title to the property once the final payment is made. If the buyer defaults on the payments, the seller can repossess the property.”

We couldn’t explain it any better, and in some states—again, like Minnesota—contract for deed is a traditional method for home financing that is even recognized and recommended in some circumstances by the State.

Contract for Deed companies like C4D specialize in this type of financing, and while they do require a down-payment, they can point you in the right direction for down-payment assistance.

As we mentioned earlier, “no money down” has been a real estate catch-phrase for years, but if you do your research, you’ll find that you can get a no money down mortgage that will allow you to become a genuine homeowner.

Hopeful homeowners know that credit is a huge piece of the mortgage puzzle. To ensure that you have a great credit score and the ability to get a traditional loan from the bank, you must start, at an early age, building credit for your future purchases — home loans, car leases, and many other purchases require a great credit score.

To increase your score, you should start by learning about credit cards, how they help raise your score and additional benefits of having your own credit card.

Let’s get into the benefits.

Through exploring the vast credit card options, you get to compare various offers. There’s more to what meets the eye when you are aiming for a specific credit card. Most of the time, there are benefits that anti-credit card individuals overlook.  

However, if you intend to evade the financial headaches, you need to know the valuable hidden offers that come with credit cards. Are you curious to find out? Here are little known benefits of owning a credit card.

Fraud protection 

Cyber attacks keep on happening each day, as the criminals seek to find vulnerable loopholes to swipe right in. At times it’s challenging to determine with a data breach has taken place where your financial info gets stolen. 

However, with a credit card, you don’t have to worry much. Most credit card organizations strive to build client profiling as well as risk preventing algorithms. Thus, you are likely to receive notification of any fraudulent transaction that you can report to the relevant authorities in no time.

As you seek to use the credit cards to build credit, you need to have an in-depth look at your credit report. It’s a chance to dispute any unauthorized expense and get the charges reversed. It’s because such a minor detail can negatively affect your credit card score.

Extended warranties 

There exist some retailers who’ll want to upsell you with an extended warranty. It often comes at a cost that you have to pay. However, you can skip this hassle by having credit cards that offer you the very same extended warranty. These are often benefits that get charged on the credit card. To know more about the extended warranty, you need to check in with your credit card issuer and understand the various goods categories that get covered.  

Concierge services 

Each passing day comes with its specific challenges. You might be using your credit card and experience some difficulties, which are often frustrating. However, you don’t need to beat yourself up while you can check to see if the credit card has a toll-free number.  

It’s a unique chance to make a call each time you are under distress while using the credit card. Thus, you can communicate to the agency’s representative and straighten out any issue that you might be undergoing through at that particular time. 

Foreign transaction charges protection 

Traveling abroad is an exciting time to broaden your horizons. You’ll need some of the local currency to enable you to buy souvenirs, pay for services, among other things.

In addition to carrying petty cash, you can have several internationally accepted credit cards with you. It’s a chance to use the credit cards that have zero foreign transaction charges. It’s a unique chance to ensure you don’t become a currency scam victim. However, you must be extra careful and ensure all your purchases get rung up in the local money.

Credit cards are quite impressive. However, the credit debt numbers and improper usage keep pilling up each day. It thus tends to overshadow the least known benefits of the credit cards. But with responsible usage, you can use Credit cards to build credit, enjoy the numerous rewards, and qualify for loans, among other things. 

Closing costs are often misunderstood. New home buyers often have a lot of questions like:

• Where do they come from?
• Who receives the money?
• Who pays them — seller or buyer?
• Is there really a no closing cost loan?

Investopedia tells us that,

“Closing costs occur when the title of the property is transferred from the seller to the buyer. The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. Homebuyers typically pay between 2% to 5% of the purchase price but closing costs may be paid by either the seller or the buyer.”

That’s somewhat helpful, but let’s look at a number of these costs, address them, and then ascertain who might pay them. Also, remember that our cost estimates are truly only estimates. You could find even wider fee ranges than we show below:

Appraisal fee ($300-$700)

Lenders will not offer you a loan until an independent third party has valued your property. If the appraisal comes in lower than the property purchase price, the bank will usually not lend the money. During the 2008 financial crisis, many blamed appraisers for artificially inflating real estate values as they were sometimes kicked back fees by banks or agents. This is highly illegal, however, and lenders today carefully vet each individual home appraisal. The buyer usually pays for the appraisal.

Home inspection ($300-$500)

According to NewsDay:

“A good home inspection can uncover repair and/or condition issues not readily apparent to the buyer. If the inspection turns up issues, the buyer can attempt to renegotiate the deal, and if the inspections was performed within the sales contract time limits, a troublesome inspection report can allow the buyer to back out of the sales contract. Buyers usually pay for this and it’s worth it.”

Application fee (varies)

Some lenders charge this but sometimes buyers can ask for a waiver.

Attorney’s fee (varies)

This can be a catch-all charge since many lenders have in-house lawyers. You can try to negotiate this out or convince the seller to pay for it.

Prepaid interest (based on loan amount)

Mortgage interest is typically paid in arrears. This means that you pay for interest accrued in March on April first. Interest accrues from the minute the loan closes, and your first payment usually isn’t due for about a month. Therefore, at closing, you are charged for the interest that is due from the closing date until your first payment. The buyer pays this. 

Origination fee (about 0.5% of loan amount)

This is simply a way for lenders to make more money by charging a small percentage of the loan to in effect make the loan to you. A half percent can be a lot of money–$2500 on a $500,000 loan, so try to get your lender to waive this.

Discount points (One point costs 1% of the loan amount)

We like Bank of America’s explanation:

“Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments. One point costs 1 percent of your mortgage amount (or $1,000 for every $100,000). Essentially, you pay some interest up front in exchange for a lower interest rate over the life of your loan.”

If you don’t want to buy down the interest rate, you won’t incur this cost.

Mortgage broker fee (0.50% to 2.75%)

Buyers sometimes use a mortgage broker because these agencies can shop the loan to multiple lenders. Only one application is needed, and the broker’s staff will babysit the transaction all the way to closing. Mortgage brokers will tell you upfront what the cost of their services will be. This is definitely buyer-paid.

Mortgage insurance application fee (varies)

Private mortgage insurance is required for some loans and loan amounts, but we don’t like this fee and urge you to ask whomever is demanding to waive it.

Property taxes (two months’ worth at least)

Most lenders will not allow your property taxes to go unpaid, so they take upfront money from you and put it in escrow so that they have control of tax payments. You have to advance them money at closing to start your escrow fund. Usually no way out of this one.

Homeowners insurance (depends on home value and location)

This is another item that lenders do not want to see unpaid, so you’ll have to escrow this money also.

Title Policy

There can be two necessary title polices—one for the seller and one for the buyer. You can negotiate who will pay for what.

There are other closing costs that you may discover, and prudent buyers will mentally set aside three percent of the total sales price for closing costs. If you are buying during a down economy in a buyer’s market, you can ask the seller to pay many of these costs and you may be successful.

If you are in a seller’s market, you can sometimes get your lender to add these costs on the back end of the loan. Either way, when your title company presents you that all-important page that lists all of the closing costs along with the net-to-seller proceeds, make sure you carefully scrutinize that list.

Whether you’re looking to purchase a house on a contract for deed, acquire a loan for college, or put down a car payment, your credit score is an essential part of the process. Credit scores are created based on a wide variety of criteria, and items such as late payments can reflect negatively on your score for years. 

Knowledge is half the battle when it comes to maintaining a high credit score, so read on to learn how late payments affect your credit and what you can do about it.

What is Your Credit Score?

To understand the importance of paying your bills on time and why late payments hurt so much, we first need to look at your credit score. Credit scores are compiled by three major credit reporting bureaus: Equifax, Experian, and TransUnion. 

They keep a record of every purchase and payment you’ve ever made. They’ll also know how many lines of credit, outstanding loans, and the debt you have to your name. So, what exactly is your credit score, and what does it mean? 

Stated by a credit repair Austin expert, the bottom line, your credit score determines how likely you are to pay creditors back on time. When you need a loan for any reason, loan officers will file with a credit reporting company for your credit report. 

Generally, the lower your credit score, the more hesitant a loan company will be to offer you the loan you want at the low-interest rate you desire. Higher credit scores always gain better loans at the best interest rates possible. 

A low credit score means you are less likely to obtain the full amount of your loan or, if you do, you’ll be paying a high-interest rate.

How Do Late Payments Impact Your Credit Score?

The single biggest factor that determines your credit score is your ability to pay back loans on time. Your credit score is the bottom line for creditors in determining how much of a loan they’ll be willing to give you, and how much of a risk you pose to their company. 

Loans are always risky, so loan companies use credit scores to ensure they’re making the wisest lending decisions possible.

When you miss a payment on your credit card, auto loan, mortgage, or other loan-device, the three reporting companies will be notified. Your late payment will then get placed into the scoring system that makes up your score.

Payment history accounts for 35% of your credit score, so missing even one payment can hurt your total score. The entire point of a credit score is to determine how reliable you are in paying back loans. Other factors impact your score but, outside of how much credit you’re using, the other factors contribute much less weight to your score.

Since payment history impacts such a large portion of your score, you could potentially drop 100 points due to a single late payment. It stays on your record for seven years, though its impact does lessen over time. 

It will, however, take quite a while to rebuild your score after significant damage.

What is Considered Late?

Nearly everyone has forgotten a bill from time to time. Two days past its due date, you suddenly remember you forgot to pay the water company and panic. You call, find out that you can pay right then and there, they slap a $20 late fee onto your regular bill, and you’re done. A sigh of relief. 

But did that late payment get recorded by the credit companies that keep track of your score? The straight answer is no. 

Late payments only get reported to the three credit reporting bureaus when they are a minimum of thirty days past due. The bill that you paid two days late will only affect your wallet, not your credit score. The car payment that you couldn’t make until forty-five days after it was due, however, will definitely show up on your score.

Do “Good Faith” Payments Help?

If you know you’ve got a bill incoming that you can’t pay in full on time, will it do you any good to pay half of the bill as a good faith statement? Unfortunately, no. 

A payment that is over thirty days late will be marked as delinquent by the credit reporting agencies, whether you’re late on $300 or .30¢. Good faith payments, while they might help you pay down your debt, will not help your credit score.

Not only do “good faith” payments not help, but the longer your bill goes unpaid, the more damage is done to your credit score. A 30-day late payment could drop your score as much as 90 to 100 points, even for someone who has never missed a payment.

How to Repair Damages

If you’ve missed a payment for a month or two, the damage has been done. There are action steps you can put into place, however, to help you get back on track.

• Pay off debt as soon as possible. Save up and pay down your credit.
• Get back to on-time consistent payments. The more you pay on time, the less damage your one-time late payment will do.
• Set up auto-pay so you’ll never miss another payment.
• If you know you’re going to be late, contact your credit agency and ask about working out a payment plan and adjusting the monthly amount owed.
• Monitor your credit report. Keep up to date on payment history, penalties, and improvements in your credit score. Many companies that help you monitor your score will also provide tips and tricks to help you improve it.

Research your options. Talk with a professional and see what debt can be written off.

What Is Your Next Step?

If you’re reading this article, you’ve probably made a late payment and realize your score has been affected. While a late payment will most certainly impact your score, it’s not permanent, and it will improve over time. 

By paying your bills consistently and keeping track of your credit score, you’ll be able to get your score back up. What step will you take to improve your score?