Who Will Refinance My Mortgage With Late Payments?
If you’re looking to refinance your mortgage but have a few late payments on your record, you do have options. We’ll cover which loan programs allow a refinance when you have a history of late payments, as well as which programs allow you to refinance when you’re behind on your mortgage. We’ll also lay out some alternatives to refinancing that might be an even better choice when you’ve made some late payments or have a delinquent mortgage.
Can you refinance if you’re behind on your mortgage or have made late payments?
Yes. If you’re thinking about refinancing a mortgage to avoid foreclosure, or if you simply want to refinance but have a few dings on your payment history, you should know that it’s usually possible.
→ If you’re currently behind on your mortgage, you’re less likely to qualify for a refinance the further past-due your loan gets. If you haven’t already, your first step should be to reach out to your lender to discuss your failure to repay the mortgage.
→ If you have a late payment or two in your past, but are now current on your mortgage payments, you’ll need to find a loan program that has flexible enough requirements for your needs. For example, you can search for low credit home loans or high-LTV loan options.
Understanding mortgage delinquency vs. default
Mortgage delinquency means that you’re late on your payments. This includes missing a payment or failure to pay the mortgage payment in full by the due date. Mortgage delinquency can occur after missing just one payment.
On the other hand, mortgage default occurs after the loan has been delinquent for some time, generally after 30 to 90 days or up to three missed payments. When a loan is in default, your lender or servicer may initiate the foreclosure process.
How to refinance if you have a history of late payments
Conventional refinance loans
Conventional loans — loans that aren’t backed or insured by the government — are a good option if you’ve had late payments in your past but have since recovered. As long as your late payments are at least a year into the rearview mirror, you can qualify for a conventional loan.
FHA rate-and-term refinance loans
Home loans backed by the Federal Housing Administration (FHA) are popular because they typically come with lower credit score and down payment requirements than conventional loans.
FHA streamline refinance loans
FHA streamline refinances are FHA loans that are only available to borrowers looking to refinance an existing FHA loan. They come with many perks for borrowers with late mortgage payments: You won’t have to deal with credit checks, income documentation or home appraisals.
VA streamline (IRRRL) refinance loans
VA streamline refinances are available to qualifying military borrowers who want to refinance an existing VA loan. As long as your late payment history wasn’t within the most recent 12 months, you should have a shot at a VA streamline refinance. Just keep in mind that at least 210 days must have passed since you took out your original VA mortgage and that you’ll have to pay a VA funding fee.
USDA streamlined assist refinance loans
If you live in a rural area, a refinance loan through the U.S. Department of Agriculture’s (USDA) streamlined assist program could be a great option. It imposes no debt-to-income (DTI) ratio limit and requires no credit check, which is great if late payments have damaged your credit — plus, you’ll also get to skip the hassle of a home inspection.
Non-qualified mortgage loans
Non-qualified (non-QM) mortgage loans don’t have to follow:
The rules set by the Consumer Financial Protection Bureau (CFPB) that make a mortgage “qualified”
The rules set by Fannie Mae and Freddie Mac that govern conventional loans
The rules from the VA, USDA and U.S. Department of Housing and Urban Development (HUD) that shape government-backed refinance loans
And while this lack of rules makes it possible for non-QM loans to have riskier features, it also means that lenders can offer refinances to borrowers who are behind on their mortgage payments. Their qualification guidelines around credit are often especially flexible, and non-QM lenders are even able to issue loans to borrowers just days after a major credit event like foreclosure or bankruptcy.
Refinance requirements: What to consider when you have a mortgage with late payments
Credit score
Most refinance loan programs have minimum credit scores that you’ll need to meet to qualify. The trouble for people with a history of late mortgage payments is that those late payments have likely already had an effect on their credit score.
Payment history is actually the single most impactful factor going into your credit score, and the larger the dollar amount of your missed payment, the larger the effect on your credit. Since housing costs are generally the single biggest line item in an American’s budget, a missing or late mortgage payment is a recipe for credit disaster.
If you start out with excellent credit, missing a single mortgage payment can knock your score down by 90 to 110 points and could continue to drag your score down for up to three years.
What credit score is needed to refinance a house?
| Loan type | Minimum credit score |
|---|---|
| Conventional loan | 620-720 |
| FHA loan | 500-580 |
| VA loan | 620 |
| USDA loan | 640 |
Home equity and LTV ratio
Equity is how much of your home you own outright, and you can calculate your equity by subtracting how much you owe on your mortgage from the home’s value. Your equity is a factor when it comes to refinancing, as most lenders will set limits on what is called your loan-to-value (LTV) ratio. An LTV expresses your mortgage debt as a ratio, dividing your current mortgage balance by your home’s value.
Current mortgage balance ÷ home value = LTV
For example, if you have a home that’s worth $350,000 and you still owe $250,000 on it, your LTV is 71% (250,000 ÷350,000 = 71%).
While LTV isn’t a factor directly tied to late payments, if you’ve missed payments and are still behind, you’re building equity slower than you planned to (and slower than your amortization schedule reflects). If you’re at or near the LTV cutoff for a refinance loan, this could stop you from qualifying.
Your LTV can also help determine:
- Where in the lender’s credit score range you’ll need to fall. For instance, if you’re looking at an FHA loan, a 90% LTV can allow you to get by with a 500 to 579 credit score, whereas a 97.75% LTV will require a 580 credit score.
- What interest rates you’ll be offered. Fannie Mae and Freddie Mac, the government-sponsored enterprises that set the rules for conventional loans, charge extra fees on conventional loans with features they believe elevate the risk of delinquency and default. These fees are usually passed on to you by your lender in the form of higher interest rates.
Conventional loan borrowers with the following characteristics may see risk-based fees or rate increases:
- Having a credit score below 780 and an LTV between 30% and 95%
- Taking out cash when refinancing
- Having a second mortgage that will remain in place once the refinance is complete
- Choosing an adjustable-rate mortgage (ARM) loan
What LTV ratio is needed to refinance a house?
| Loan program | Refinance loan type | Maximum LTV |
|---|---|---|
| Conventional | Rate-and-term | 97% |
| Cash-out | 80% | |
| FHA | Rate-and-term | 97.75% |
| Cash-out | 80% | |
| VA | Rate-and-term | 100% |
| Cash-out | 90% | |
| USDA | Rate-and-term | 100% |
| Cash-out | Not allowed |
Debt-to-income ratio
Your DTI ratio expresses the relationship between your monthly income and your monthly debt obligations. Also known as a “back-end” DTI ratio, it captures what percentage of your income will go to all of your debts (including housing) once you’re in the home. A “front-end” DTI ratio is a special variation of the DTI ratio, which shows only the percentage of your income that goes toward housing costs.
If you’re behind on your mortgage or had a rough patch in the recent past where you weren’t able to make payments on time, you may be struggling with other debt as well. If that’s the case, you should know that your DTI can limit your refinance options or make taking out a loan more expensive.
What DTI ratio is needed to refinance a house?
| Loan program | Refinance loan type | Maximum DTI |
|---|---|---|
| Conventional | Rate-and-term | 45% |
| Cash-out | May be lower than 45% in some cases | |
| FHA | All | 43% back-end ratio |
| VA | All | 41% back-end ratio |
| USDA | All | 41% back-end ratio |
Refinancing after forbearance
If your loan is exiting forbearance and you’re looking to refinance, it’s likely you’ll be able to — eventually. How long you’re required to wait will depend on the circumstances of your financial hardship and whether you kept up with any scheduled payments included in your forbearance plan.
If you entered forbearance due to COVID-19, you generally won’t have to wait at all, as long as you’ve made your most recent three to six payments on time. The table below shows the details:
| Refinance type | Mortgage payment history requirement |
|---|---|
| Rate-and-term refinance |
|
| Cash-out refinance |
|
| Streamline refinance |
|
However, if your difficulties were unrelated to COVID, you could be stuck waiting for up to 12 months before you can refinance.
Refinancing after loan modification
If you’ve already been through the loan modification process with your lender, you’ll typically have to wait 12 to 24 months after the loan modification to qualify for a refinance. However, if your loan modification was after you exited a COVID-19 forbearance program, you won’t need to wait, as long as you made the last six to 12 payments of your loan modification on time.
| Refinance type | Mortgage payment history requirement |
|---|---|
| Rate-and-term refinance | Six consecutive monthly payments |
| Cash-out refinance | 12 consecutive monthly payments |
| Streamline refinance | Three consecutive monthly payments |
Alternatives to refinancing with late payments
If you’re unable to refinance your mortgage, you have a variety of alternatives to fall back on. Your exact course of action will depend on your mortgage type, how past-due you are and your lender’s options. While some of these alternatives allow you to remain in your home, others do not.
Consult your lender right away to discuss your options and next steps. A HUD-approved housing counselor can also provide further guidance.
Repayment plan
With a repayment plan, your lender will provide you with a structured agreement to satisfy your late or unpaid mortgage payments. This can include paying a portion of the past-due amount with your monthly payments until the loan is current. Your lender may also allow you to defer the unpaid mortgage amount until the end of the loan term.
Entering a repayment plan enables you to stay in the home and bring the loan current if you can’t refinance the delinquent mortgage.
Mortgage forbearance
If you’re experiencing financial hardship — loss of a job, illness, natural disaster or other events — you may qualify for mortgage forbearance. With a mortgage forbearance, your lender will
Note that forbearance doesn’t eliminate the paused or reduced payments. Interest on the loan will continue to accrue, and your lender will provide options for recouping the reduced or paused amounts.
Mortgage modification
A mortgage modification reduces your monthly payment by changing the terms of your loan. For example, your lender may modify your mortgage by extending the loan term, reducing the interest rate or reducing the principal balance.
It’s easy to confuse loan modification with refinancing, but the two aren’t the same. With a loan modification, you’ll still have the same mortgage and lender but with revised terms. In addition, you won’t pay fees or closing costs to modify your loan. On the other hand, if you refinance, you’ll have a new loan that pays off the existing mortgage balance — though you’ll also have to pay refinance closing costs.
Short sale
If your mortgage is “underwater” — when you owe more on your loan than the house is worth — you might want to consider a short sale. A short sale allows you to sell your home for less than it’s worth, and your lender accepts the proceeds of the sale as repayment of the loan, often without you having to come up with the entire loan amount. While a short sale will negatively impact your credit, the effects could be less harmful than what you’d see with a foreclosure on your record, and you could also have some of your debt forgiven.
Deed-in-lieu of foreclosure
A deed-in-lieu of foreclosure is when you willingly give up a home to avoid foreclosure. Your lender will sell the property and use the proceeds of the sale to recoup the part of your mortgage balance you weren’t able to repay yourself.
Although you won’t be keeping your house in the long run, a deed-in-lieu has several short-term benefits: You may be able to stay in the house longer than if you went through foreclosure, some of your loan balance may be forgiven and you may also receive monetary relocation assistance.
A deed-in-lieu of foreclosure will impact your credit negatively, but less so than a short sale or foreclosure.