Are Mortgage Payments Paid in Arrears?

“In arrears” is a financial and legal term that refers to a payment obligation that has not been met by its due date. It signifies that money is overdue. Its most common usage in finance denotes a late or missed payment.

Defining Mortgage Arrears

Mortgage payments are typically due on the first day of each month. A mortgage account enters “arrears” when one or more scheduled payments are missed and become overdue. This differs from a merely late payment, as most mortgage agreements include a grace period, often between 10 to 15 days, during which a payment can be made without incurring a late fee. If the payment is received within this grace period, it is not considered officially late or in arrears for penalty purposes.

However, once the grace period expires, the payment is officially late, and the mortgage account may then be considered in arrears. Lenders typically track payments and classify accounts as in arrears based on the terms outlined in the mortgage agreement. For instance, while a single missed payment technically means an amount is owed, some lenders might not formally consider an account in significant arrears until payments are 30 days or even three months overdue. The specific timing and definition of when a mortgage is officially in arrears can vary depending on the individual loan contract and the lender’s policies.

Impact of Being in Arrears

Falling into mortgage arrears carries several financial consequences for a homeowner. Once a payment moves beyond the grace period, typically 15 days past the due date, lenders will impose late fees. These fees are generally calculated as a percentage of the overdue payment amount, often ranging from 4% to 5%.

A significant impact of mortgage arrears is the negative effect on the homeowner’s credit score. If a payment becomes 30 days past due, lenders typically report this delinquency to credit bureaus. A single late payment can substantially lower a credit score, potentially by 90 to 110 points or more, and this negative mark can remain on a credit report for up to seven years. This can affect the homeowner’s ability to obtain new credit, such as credit cards or auto loans, or lead to less favorable terms and higher interest rates in the future.

As arrears accumulate, the lender will intensify communication with the homeowner, sending notices of default or delinquency and making phone calls. These communications serve as warnings that the home is at risk. If the homeowner continues to miss payments, typically after 90 to 120 days (three to four missed payments), the lender may initiate formal foreclosure proceedings. While arrears are the initial step, lenders prefer to avoid foreclosure and will often attempt to work with borrowers to resolve the situation.

Steps to Address Arrears

When facing mortgage arrears, proactive communication with the mortgage lender is paramount. It is advisable to contact the lender as soon as possible, even before a payment is missed, to discuss the situation. Lenders are often willing to work with homeowners to find a solution, and early engagement can prevent the situation from escalating.

Before contacting the lender, homeowners should gather necessary financial documentation to demonstrate their financial situation. This includes proof of income, such as recent pay stubs and W-2 forms, and asset statements like bank and investment accounts. Additionally, documents related to any financial hardship, such as medical bills or unemployment notices, can be helpful.

Lenders may offer various options to help homeowners address arrears. These can include repayment plans, where missed payments are spread out and added to future regular payments over a defined period. Another option is forbearance, which allows for a temporary reduction or suspension of mortgage payments, providing short-term relief during financial hardship. Loan modification is a more permanent solution that changes the terms of the loan, potentially lowering the interest rate, extending the loan term, or adding missed payments to the loan balance to reduce monthly payments. Seeking advice from a housing counselor can also provide valuable guidance and support during this process.