Do Late Payments Affect Buying A House? What You Need To Know

If you’re thinking about buying a house, your credit history is one of the key factors lenders will look at to determine if they’ll approve you for a mortgage loan. Specifically, they’ll want to see that you’ve made your credit payments on time. So if you have any late payments on your credit report, you may be wondering – do late payments affect buying a house?

The short answer is yes late payments can definitely impact your ability to qualify for a mortgage. But the good news is that all hope is not lost if you have a few late payments. Here’s a detailed look at how late payments can affect mortgage approval, and what you can do to still get approved.

How Mortgage Lenders View Late Payments

Lenders will carefully look at your credit report and credit scores when they look over your mortgage application. This lets them know how reliably you’ve paid your bills in the past.

Your payment history is one of the most important parts of your credit score. If you are often late on payments, it can lower your score by a lot.

According to FICO, here’s how different levels of lateness impact your credit score:

• 30 days late – Score drops up to 90 points
• 60 days late – Score drops up to 110 points
• 90 days late – Score drops up to 135 points
• 120+ days late – Score drops up to 160 points

You can see that one payment that is late by 30 days can hurt your credit score a lot. Multiple late payments have an even greater effect.

To get a mortgage, lenders usually want to see that a person has good credit. The most commonly used scores are:

• FICO Score – minimum 620
• VantageScore – minimum 660

If your scores are below these thresholds due to late payments, you may have trouble getting approved.

Conventional Mortgages and Late Payments

For a conventional mortgage backed by Fannie Mae or Freddie Mac, the credit standards are a bit stricter when it comes to late payments.

Conventional loans typically require:

• No 30-day late payments within the last 12 months
• No 60+ day late payments within the last 24 months

So if you have any payments that were more than 30 days past due in the previous year, or any 60+ day late payments in the past two years, you probably won’t qualify for a conventional loan.

FHA Loans and Late Payments

The FHA has more flexible guidelines regarding late payments than conventional mortgages. Here’s what they allow:

• No more than two 30-day late payments within the past 12 months
• No 60+ day late payments within the past 24 months

So you have a little more leeway with the FHA. As long as you don’t have more than two 30-day late payments in the previous year or any payments over 60 days late in the last two years, you may still be able to get approved.

VA Loans and Late Payments

For a VA loan, here are the credit standards when it comes to late payments:

• No more than one 30-day late payment within the past 12 months
• No 60+ day late payments within the past 12 months

VA loans have strict criteria similar to conventional mortgages. No more than one 30-day late payment is allowed in the previous year, and no 60+ day late payments at all in the past year.

How to Improve Your Chances After Late Payments

If you have late payments but still need to buy a house soon, there are some steps you can take to help improve your chances of approval:

• Pay down balances – Lower credit utilization can help offset a score drop from late payments.

• Add positive information – Open new accounts and make timely payments to rebuild your credit.

• Explain late payments – Draft a letter explaining the reason for your late payments.

• Improve other score factors – Make sure you have a mix of credit types and a long credit history.

• Build savings – Having a larger down payment and ample reserves can help.

• Bring accounts current – If you still have open accounts that are past due, bring them up to date.

• Wait for late payments to age – After about a year, the impact on your credit score will decrease.

• Get a cosigner – Adding someone with good credit may help you qualify.

• Explore lender exceptions – Some lenders offer exceptions or have more lenient policies.

With some work, it’s possible to get a mortgage even with a few late payments on your record. The better your credit and finances look otherwise, the easier it will be to get approved. Shopping around with different lenders can also help improve your chances.

Alternatives if You Can’t Qualify for a Mortgage

If your late payments are too recent or too severe to qualify for a mortgage right now, there are some alternative options to get you into a home:

Rent for 1-2 years – Time will allow late payments to age off your credit report, improving your scores.

Buy as a cash buyer – Cash buyers don’t require financing, so credit isn’t a factor. However, few people can pay 100% in cash.

Lease to own – Lease the home first with an option to purchase once your credit improves.

Rent with option to buy – Rent for 1-2 years with an agreement to buy the home when the lease ends.

Owner financing – The seller finances your purchase directly instead of going through a mortgage lender.

Portfolio loan – Smaller lenders may offer more customized loan programs with flexible guidelines.

FHA 203(k) rehab loan – Finance home improvements allowing you to buy a fixer-upper.

USDA loan – Eligible rural properties only, but very flexible credit guidelines.

VA rehab loan – For fixer-uppers if you’re an eligible veteran.

FHA Back to Work Program – For homeowners who went through bankruptcy or foreclosure.

Fannie Mae HomeReady Program – Low down payment and flexible credit options.

With less-than-perfect credit, you may need to get creative or bide your time. But know there are still pathways to homeownership available. Do your research to understand all the mortgage programs and alternatives out there.

The Impact of Late Payments Over Time

Keep in mind that the negative impact of late payments on your credit diminishes as time goes on. Here’s a rough timeline:

• 0-6 months – Maximum damage to credit score and mortgage approval odds.

• 6-12 months – Still a major factor hurting credit score and mortgage chances.

• 1-2 years – Damage to credit score slowly going down each month. Mortgage approval still difficult.

• 3-4 years – Credit score damage has reduced significantly. Much better mortgage approval chances.

• 5-6 years – Late payments starting to “fall off” credit reports. Credit score greatly recovered.

• 7+ years – Late payments no longer appearing on credit report. Little to no impact on credit or mortgage application.

So while those late payments can hinder your homebuying plans now, take comfort knowing your situation will gradually improve with time. The further in the past the late payments are, the less they matter.

Key Takeaways

Late credit payments can definitely make it harder to get approved for a home loan. How much they impact your mortgage application depends on factors like:

• How recently they occurred
• If they are 30, 60, or 90+ days late
• How many late payments you have
• The mortgage program guidelines

To maximize your chances, pay down balances, add positive credit, save for a larger down payment, and explore alternative mortgage options. Within a few years, the late payments will bother you less and less.

While there’s no way to make late payments instantly “disappear” from your credit report, they become less of a deal-breaker as time passes. With prudent financial management going forward, you can still achieve your dream of homeownership.