Being late with any payment affects your credit score, but being late with your mortgage has a stronger long-lasting effect on your credit score than most people know.
FICO, which stands for Fair Isaac Corporation, is the credit-scoring system money lending entities use to check a person’s creditworthiness. FICO information such as debt-to-income ratio, payment history, credit inquiries, new credit accounts and many other factors to determine an actual credit score.
Out of all the factors involved in tabulating your credit score, payment history accounts for 35% of your FICO score. According to the Ask Experian Team, a missed mortgage payment will also have the longest lasting impact. The more recent the missed payment occurred, the greater the impact and the more missed payments you have, the longer it will take to restore your scores.
FICO did a study back in 2011 that showed how badly late mortgage payments affect your scores. Even though the study is three years old, the information is still very accurate. FICO researched various types of delinquencies. Using profiles of people with credit scores of 680, 720 and 780, the study showed that after a 30-day delinquency, their scores dropped to 600-620, 630-650 and 670-690 respectively.
It’s not just the drastic drop in the credit rating that hurts a person, it’s the amount of time it takes to get back to the higher score. For the person who was at 680, it would take about nine months to raise their score, two and a half years for the person with the score of 720 and three or more years for the person with the 780 score. The general rule the research group discovered was the higher the score the longer it will take to recover.
Even after you start making mortgage payments on time to rebuild your credit; late payments can stay on in your credit history for years. Depending on the time between the last delinquency and buying a new home, it may be hard to get a decent mortgage offer. For most banks and lenders, you have to have at least 12 months of on-time payments to even qualify for a new mortgage. And for who are able to get a loan, it is at a much higher interest rate or require a large down payment.
The best thing to do in a situation like this is to bring your account current as quickly as you can and make on-time payments to rebuild your creditworthiness. Experian suggests paying at least one credit card in full each month to avoid finance charges. One time payments like this will add positive activity which can offset negative activities on your credit report.
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