Definition:
A late charge is a fee charged by a lender when a borrower fails to make a mortgage payment on time, usually after a grace period of a few days past the due date.
Example:
Maria’s mortgage payment is due on the 1st of each month, with a 15-day grace period. When she makes her payment on the 18th, her lender charges her a $75 late charge for missing the deadline.
Explanation:
Late charges are meant to encourage borrowers to make timely payments and compensate lenders for the inconvenience or administrative cost of dealing with overdue accounts. The specific amount of the late charge and when it applies are outlined in the loan agreement.
Most mortgage lenders provide a grace period—usually 10 to 15 days—after the due date before a late fee is applied. If the payment is not received by the end of that grace period, the borrower is charged a flat fee or a percentage of the overdue amount (typically around 4% to 5%).
Late charges are separate from penalties that affect a borrower’s credit score. A payment is generally not reported as late to credit bureaus unless it is 30 days overdue, but late charges can still be added as early as a few days after the due date.
Why is Late Charge Important in Real Estate Transactions?
Late charges are important because they affect a borrower’s financial standing and the overall cost of the loan. For buyers, understanding late charges helps them stay on top of payments and avoid unnecessary fees. For sellers and lenders, a history of on-time payments can signal a buyer’s reliability. Staying current on payments ensures a smoother real estate transaction and helps protect credit health.