Refinancing Options for Homeowners Behind on Mortgage Payments

# Bulleted Breakdown

* Struggles with Mortgage payments can be a common issue.
* Refinancing your mortgage can result in lower monthly payments.
* Despite some challenges, late mortgage payments don’t always prevent refinancing.
* Various refinancing options based on the type of home loan you have.
* Disqualifications for refinancing include high debt, low credit score, unstable employment, and too many late payments.
* There are strategies to manage mortgage payments if you’re behind.
* FAQs for those considering to refinance.

# My Hot Take

Feeling like the tortoise in the race against your mortgage payments? Don’t panic, we’ve all been there! With patience, like that wise old tortoise, solutions can be found. Refinancing is like giving your old mortgage a facelift and can potentially get you more favorable terms. Endurance and persistence are key, even with a few late payments in the rearview mirror. Let’s turn that hare-brained stress into tortoise-ly wise financial strategies, so you can ease off the brakes and start cruising down the road to stability!

# The Article

Keeping Up With Mortgage Payments: The Tortoise and the Hare Approach

In the never-ending race of life, sometimes it feels like we’re the tortoise, and our mortgage—the seemingly invincible hare. Still following me with the metaphor? Good. Now, imagine we’re nearing the end of our fable, and our turtle friend is losing steam, inching towards losing the race. Suddenly, he spots a pit stop – mortgage refinancing. It’s the power-up our hero needs to take the lead! Let’s branch out from our tale to help you find that same chance of victory in your personal financial race.

Life Behind On The Mortgage Payments

You’re not the lone tortoise if you’re lagging on your monthly mortgage payments. It’s a club with many reluctant members. Charting the course of this story is a key stat from the Mortgage Bankers Association: delinquency rates bobbed up to 3.62% in the third quarter of 2023. That’s quite a few homeowners experiencing a severe speed bump.

Refinancing: A Quick Pit Stop or A Dead End?

When the monthly mortgage drains your fuel, refinancing appears as a warm and inviting pit stop. It involves switching your existing mortgage with a new one. The new loan, ideally with jollier interest rates and term lengths, pays off the old loan. Simple, isn’t it? Well, late mortgage payments can turn that simple into tricky faster than you can say “Tortoise for the win!” But fear not! It’s a tough challenge, sure, but impossible? Nah! Zip through the details about refinancing with late payments, and you’ll know exactly what I mean.

Can I Refinance With Late Payments?

Yes, you heard it right. It may be possible to refinance your mortgage despite falling behind on payments. However, several variables come into play. They include your type of home loan, your creditworthiness, and your income and employment track record, to name a few. If late payments are a recent speck on your track record and involve a significant amount, qualifying may become a tough nut to crack.

Different Lanes of Refinance for Different Loans

Your potential to refinance with late payments hinges majorly on the type of home loan you have. The guides to what you might expect with some of the most common mortgage types are as follows:

Conventional Mortgage Refinance: Critters on the Course

A conventional loan doesn’t fall under Uncle Sam’s lock and key. So, if you own a conventional loan, you may qualify to refinance your mortgage if you can tick off all the boxes of the Fannie Mae rules:

  • Your loan must be riding smooth when you apply, with no more than 45 days since your last fixed payment.
  • You should not have any payments late by 60 days or longer in the 12 months just before your credit report is pulled out.

FHA Refinance: Friendlier Track Conditions

Federal Housing Administration (FHA) loans are popular among borrowers due to their more loving credit score and down payment requirements compared to conventional loans. This congeniality extends to late payments too. Here are the key points:

  • FHA simple refinance: This option may let you twerk the rate and terms of your loan to shrink your monthly mortgage payments. To qualify, you’ll need to be smooth sailing on your loan payments for the six months leading up to your refinance application. A professional appraisal of your home’s value is also needed.
  • FHA streamline refinance: This option differs from the simple refinance as it eliminates the need for an appraisal or a credit report check. However, you must be updated on your monthly mortgage payment, no 30-day-late payments (or longer) within the past six months and no late payments longer than 30 days in the past 12 months. If your original loan is still a toddler, it should be “seasoned”. Meaning, since closing, you would’ve had the loan for at least 210 days and made six on-time monthly payments.

VA Streamline Refinance: The Veteran’s Edge

Veterans Affairs (VA) home loans can be refinished through a VA interest rate reduction refinancing loan (IRRRL), also referred to as a VA streamline refinance. The VA guidelines state you can refinance loans 30 days or more overdue, but prior approval is a must. Your new loan may even cover your late payments and charges as well as “reasonable costs” if loan ending process has already kick-started.

Though the VA has its conditions, individual lenders often set their own qualifications too. For instance, Veterans United’s IRRRL requirements argue you can’t have any 30-day-late payments in the past 12 months on the loan you aim to refinance.

USDA Streamlined Assist Refinance: A Helping Hand within the Race

The United States Department of Agriculture (USDA) provides three refinancing plans for homeowners with existing USDA loans. These allow you to refinance even with low or no equity with no requirement of a credit check. However, being updated on your payments is vital. The late payment guide for USDA’s refinancing plans is:

  • USDA streamlined and non-streamlined: No late payments (overdue by more than 29 days) for 180 days prior to applying for a USDA refinance.
  • USDA Streamlined Assist: No late payments for 12 months before requesting to refinance.

If your payments lag behind currently, you may need to catch up and then wait for a minimum of 180 days sans a late payment before applying.

What Could Disqualify You From Refinancing?

Before applying for a refinance, it’s wise to make sure you’re entering the race with your best foot forward. There’s no point in shooting from the starting line if your engine is only going to conk out halfway through, right? Let’s take a look at some of the issues that may lead to a loan denial and ways to deal with them:

High Debt: The Weight on Your Shoulders

Imagine being in a race with a large backpack. That’s exactly what high debt feels like. Too much debt is a prime factor for lenders slamming the brakes on refinance applications. Lenders keep a keen eye at your debt-to-income ratio (DTI), the percentage of your total monthly income that goes towards your debt repayments. Generally, a DTI below 43% gets a nod from the lenders. But, if it falls below 36%, it brightens your chances. Government-backed loan refinancing may be more flexible, allowing DTIs up to 45%.

Low Credit Score: The Penalty for Slow Runs

To qualify for refinancing, your credit score needs to be on point. This requirement may vary based on your choice of refinancing:

  • Conventional loan refinance: Credit score cannot be lower than 620.
  • Jumbo loan refinance: Credit score needs to be at least 700.
  • FHA loan refinance: Minimum credit score of 580.
  • VA loan refinance: Minimum credit score of 580.
  • USDA loan refinance: Although USDA doesn’t ask for a minimum credit score, lenders generally look for a score not less than 620.

Too Many Late Payments: Multiple Pit Stops

Regardless of your credit score, home equity, and debt size, lenders might be red flagged by frequent late mortgage payments. For instance, although the VA permits refinancing loans, some VA lenders might not refinance your loan if there are more than 30 days past due.

Insufficient Home Equity: Not Enough Fuel in the Tank

Lenders generally expect you to have at least 20% home equity for refinancing. However, different lenders, different rules, and some even accept as low as 5% equity. Government-backed refinancing programs typically have lower home equity barriers.

  • Conventional refinance: Minimum of 20% home equity.
  • FHA streamline refinance: No minimum equity (but you may need 20% equity for cash-out refinances.)
  • VA refinance: No minimum home equity.
  • USDA streamline refinance: Little to no home equity.

Low Income or Spotty Employment: The Fickle Race Schedule

Lenders assess your earnings and workplace status to gauge your ability to time your new home loan payments. Therefore, they might throw out your refinancing application if your career graph has too many dips or your income doesn’t meet your monthly obligations. If you’ve recently hopped from job to job or have had a period of unemployment, lenders might want a peek at your earning history of the last two years.

Strategies to Fight Back when Behind on Mortgage Payments

Reach out to your loan servicer asap if your payments seem to be lagging. It’s smart to plan ahead and explore available options to avoid hurdles such as late fees or foreclosure. They may include:

Apply for a Rate-and-Term Refinance

Refinancing your mortgage to trim down your payment might make running your mortgage race a bit smoother. This strategy might slot into your game plan if you have at least 20% equity in your house. Some lenders might even allow lower equity, especially, while refinancing a government-backed loan. Teaming up with an independent loan agent who works with multiple loan providers could be helpful, especially those who are experienced in dealing with borrowers with late payments or bad credit.

Request a Pit Stop: Mortgage Forbearance

If your income has hit a speed bump or if you’re going through a temporary speed bump, it’s wise to request a mortgage forbearance, to lower or push pause on your mortgage payments for up to 12 months. As an extra bonus, lenders rarely wave the foreclosure flag during the forbearance period. Once the stop-time ends, you’ll need to fill in for the postponed payments, typically through an upfront payment or a repayment plan.

Ask for a Mortgage Tune-Up: Modification

Unlike a refinance which takes out a new loan, a mortgage modification adjusts your existing loan’s conditions to make it more affordable. If your lender nods to a modification, they could reduce your interest rate or increase your loan period to decrease your loan payment. Yet, a longer loan term means you’d make more payments that could accrue more interest with time.

A loan modification could assist you in staying updated on your mortgage payments. To qualify, your lender might ask you to complete a hardship form to understand your circumstances thoroughly.

Frequently Asked Questions

  • Lenders generally ask for a credit score of at least 620 for a conventional loan refinance or 700 for jumbo loans. Government-backed loans may be a bit more welcoming, with a minimum of 580 for FHA and VA loans. Yet, aside from FHA and VA loans, lenders have their own set of credit scores.
  • The number of payments before refinancing variates based on your original loan terms and your choice of refinancing. Several conventional loans can be refinanced right after closing. On the other hand, an FHA streamline refinance needs at least six timely payments and a minimum of seven months to pass from your closing date for refinancing.
  • When you refinance a mortgage, it’s not skipping a payment but may appear so. Remember, your original loan is paid off entirely at closing. Therefore, if you close in mid-month, you’ve already made payments up to the closing date. From the day after closing your new loan starts rolling in costs, so it’s no break from payments. Contact your loan servicer and broker for precise information so you don’t miss a payment and risk your credit score.

The Final Whistle

If you’re trailing behind on your mortgage payments, don’t wait till the last lap of the circuit! Connect with your home loan servicer to explore available options and avoid any crashes, whether that’s late fees or foreclosure. You could refinance your loan, ask for a loan forbearance, or modify your loan, for all it takes a good strategy to win the race! To get the best of this, it could be handy to work with a loan broker to interact with multiple lenders to tweak your loan to fit your capacities.

Keep an eagle eye on your credit. Good credit can be your co-driver on this long and winding road. Updates every 30 days can help you stay informed and move forward on this track!