Mortgages

How to Get a Mortgage Despite a Debt Judgment

Comments 10 Comments

A judgment is a painful court order to pay a debt, and can arise from a lawsuit, a divorce, business dispute or an array of other possibilities. Judgments are public record. They will appear on your personal credit report and can wreak havoc on your credit scores. They can also hurt your ability to get a mortgage — unless you take specific steps.

If you’re hoping to get a mortgage, any mortgage company is going to examine what led to the judgment and, more importantly, how the judgment will be accounted for.

Whether buying a home or refinancing a home you own already, the judgment will be reviewed and examined in the same manner.  The lender is looking for any potential signs of a disregard for financial obligations and inability to manage liabilities, as this could signify a future risk of default on the mortgage they’re issuing.

What Consumers Must Know

  • If there are open judgments or garnishments specifically identified in the public records section of the borrower’s credit report used in conjunction with the loan acquisition…
  • Then the liability needs to be paid off at or before close of escrow on the new mortgage.

As an exception to the rule, the consumer — rather than having to pay off the judgment in full — can agree with the creditor to make timely and regular payments. The consumer will need to provide a copy of the written agreement with at least six months of timely payments made prior to the official mortgage loan approval. Additionally, a consumer is unable to prepay future months’ worth of payments in lieu of the payment history. In other words, there has to be a demonstrated consistent payment history. Additionally, the monthly payment amount must be accounted for in the qualifying process, which can limit borrowing power by increasing the consumer’s debt-to-income ratio.

Garnishments and Borrowing Power

Commonly, a judgment will involve wage garnishment. Wage garnishments are accounted for in the exact same fashion and affect debt-to-income ratio the way other payment liabilities such as a car loan, student loan or credit card would.

The debt-to-income ratio is a method lenders use to measure how much of your income is allocated for paying debts. The higher percentage of income that goes toward debt, the more challenging it can be to secure a mortgage. Conversely, the more income left over after paying debt obligations, the better.

Take a consumer who earns $10,000 in monthly income looking to borrow $400,000. Let’s assume this consumer’s total mortgage payment will be approximately $2,800 (principal, interest, taxes and insurance, and private mortgage insurance). Let’s also assume this individual has a $500 car payment, and $200 per month in minimum student loan payments.

If this consumer has no judgment or wage garnishment …

Then this borrower has a healthy debt-to-income ratio of 35%, meaning that 65% of his income is left over after all the obligations are accounted for.

($2,800 mortgage payment +  $700 in loan payments ÷ $10,000 monthly income = 35%)

If the same borrower has a judgment for $20,000, and the monthly payment for the past six months has been $600 per month …

Then the calculation works like this:

($2,800 mortgage payment + $700 loan payments + $600 monthly repayment on $20,000 judgment ÷ $10,000 monthly income = 41%)

The $600 per month payment on the judgment is 6% of the monthly income.

As a general rule of thumb, for every dollar of debt, two dollars in income is required to offset it (for ratio of 2:1).

Offsetting Judgment Debt

If you have the financial means and can take a portion of your available cash on hand to pay off the judgment in full, that is the ideal situation as the liability is paid off, and not to resume for future responsibility. If you don’t have the cash, the next best alternative is set up an agreement to pay off the debt in monthly payments. In order to accomplish this, you would need to have at least 55% of your monthly income left over after paying the wage garnishment/judgment liability, mortgage payment, and any other debt obligations like personal loans, credit cards and auto loans.

[Editor’s note: If you’re shopping for a mortgage and you have a judgment on your credit report, it’s especially important to check your credit reports to make sure there are no errors in how the debt is reported.  You can check your credit reports for free every year from each of the major credit reporting agencies.  It’s also helpful to keep an eye on your credit scores as you pay off debts and rebuild from a judgment, especially if you’re in the market to buy a home.  There are free tools that allow you to monitor your scores, such as the Credit Report Card from Credit.com – which updates your scores and an overview of your credit reports every month.]

More on Mortgages and Homebuying:

Image: Devonyu

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • http://www.avoidbk.com/ Jared Strauss

    Great information, Scott. I would like to add that judgments are generally negotiable. I’ve negotiated recent settlements on judgments for 30-60%. So if a lump sum is available, settling may be an option in these situations.

  • http://www.credit.com/ Credit.com Credit Experts

    Scott Sheldon replies: Hi Jared-thanks for the compliment. Yes they are definitely negotiable settling is always an option as all the lenders looking for is a zero balance in most situations or whatever the payment plan minimum payment is.

  • breanne05

    I am in a similiar situation. My husband has a judgement against him from an individual in a way by default-for not appearing to the court date. Our credit is good enough to get a mortgage loan but will we have to take care of the judgement first before we could obtain a loan from a lender?

    • http://www.Credit.com/ Gerri Detweiler

      Likely yes. I’d suggest you talk with a mortgage professional who can review your situation.

      • ScottSheldonLoans

        Breanne,
        The judgment may not be as bad as it sounds. Do you know what the minimum monthly payment is on the judgment? Remember when trying to qualify to buy a home or to get a mortgage the lender will use just the minimum payment obligation that’s due for counting the liability. If it’s a judgment with no payment plan then yes either he would have to get paid off in full perhaps settled or work out a payment plan. Hope this helps but it does not automatically mean you cannot get a loan.

  • BigG

    My wife and I are looking for a USDA Loan. My credit is 661 hers is 643 we have a joint judgment for $4k from an auto repo back in 2009. The judgment was in 2010. I have a $50/month garnishment for the judgment which started last year 11/2013. No over credit issues. What are the chances we could be approved?

    • ScottSheldonLoans

      The lender will more than likely take a fine tooth comb to the rest of your credit history as a result of the judgment. $50 per month as the minimum payment obligation on the judgment could absolutely be manageable so long as the other minimum payments on your credit obligations are low enough to support house payment. Depends of course on how much your purchasing the property for as that will dictate what you’re mortgage payment is going to be. For example if your new mortgage payment is $1500 per month, and you you have $50 per month on a garnishment payment you and your hubby would need to earn $3659 per month to qualify for a USDA loan assuming a 41% debt to income ratio. Lenders do take USDA loans a little bit more conservatively. Take your minimum payment obligations just the minimum payments on all of your credit accounts add that to your new proposed total mortgage payment and then divide that number by .41 that will tell you the income you need to offset the payment. Sounds like if that’s the only issue $50 per month may not be that big of a concern so long as you have income to offset that payment your other payment obligations and of course your new proposed total mortgage payment.

  • Steve Plummer

    I work as a credit counselor in Massachusetts. Before that, I practiced law for 30+ years. Frankly, I have never seen a mortgage lender that was willing to loan money to a borrower who had an active judgment on the books—why? because a judgment acts as a lien against any real estate in the county, meaning that the judgment lien may (and probably will) take precedence over the new mortgage (because the judgment is sitting there already). Are you folks saying that a lender will ignore a judgment as long as the borrower is making payments? What about the impact of the judgment lien on real estate? Or maybe the law is dramatically different in Cal? Just wondering if I need to rethink the advice I am giving first time homebuyers, which always is to pay judgments before applying for a home loan. Thoughts?

    • ScottSheldonLoans

      In short no lender will ever ignore a judgment. A judgment
      needs to be resolved prior to closing escrow in every instance if it is not
      already. If there is a judgment balance out there and there is no payment plan
      associated with the liability, then yes it would have to be paid off before
      buying the house. If there is or will be an agreed-upon active payment plan
      between creditor and debtor, the liability is still not ignored, but rather is
      accounted for in the debt to income ratio. As long as it is accounted for in
      the debt to income ratio, this should suffice from a lending standpoint. Buyers
      would be best served speaking to a qualified lender in their particular area in
      which they are buying to make sure these requirements are eligible in their
      particular area.

      First-time homebuyers ought to see if a payment will be
      manageable with their cash flow and if it is, that might be a better direction
      to take as those additional funds could be used for a down payment and/or
      closing costs.

  • Steve Plummer

    I don’t mean to keep this going, and I certainly don’t want to come across as negative. But I’ve done credit counseling in three different states, in each of which a judgment operates as an automatic lien on any real estate owned (then or later) in the county. No lender in those states will make a home loan as long as the borrower has a judgment against him in the county where the real estate is located. On rare occasions the lender will consider a judgment as part of the debt to income ratio IF the judgment is in another county….but that’s rare because the judgment creditor could easily transfer the judgment to the judgment debtor’s county before closing. So, if a potential home buyer has an outstanding judgment, my advice is to pay it before approaching your lender about a home loan. The law in every state is different, of course, but paying the judgment is always the prudent course of action.

Find out where you stand.
Get your FREE personalized credit report card.

Sign Up Now
X

Stay Connected to your experts

Please submit your email address to get credit & money tips & advice
from our team of 30+ experts, delivered weekly to your inbox.