December 7, 2016
A reader asks us a question about FHA loans and credit issues this week: “I have applied for a mortgage and I have a judgement on my credit that is part of a class action law suit. Does this judgement affect my chances for getting a mortgage with FHA. Or do I need to pay off this judgement. Is there any exceptions to this situation?”
FHA loans are governed by the rules in HUD 4000.1, which include instructions to the lender specifically about judgments. What does the FHA view as a “judgment”? Here’s the definition from the rule book:
“Judgment refers to any debt or monetary liability of the Borrower, and the Borrowers spouse in a community property state unless excluded by state law, created by a court, or other adjudicating body.”
What the lender is supposed to do in these cases is insure that the judgment was satisfied in some way, and that the borrower’s creditworthiness is sound in spite of having the judgment on his or her credit record.
The lender is tasked with insuring the judgment is satisfied as a condition of loan approval. From HUD 4000.1:
“The Mortgagee must verify that court-ordered Judgments are resolved or paid off prior to or at closing.” When applying for FHA loans, borrowers affected by this issue should know there are also rules that allow for a satisfactory arrangement made between the borrower and the creditor. This arrangement may work as a substitute to having the entire judgment paid in full.
“A Judgment is considered resolved if the Borrower has entered into a valid agreement with the creditor to make regular payments on the debt, the Borrower has made timely payments for at least three months of scheduled payments and the Judgment will not supersede the FHA-insured mortgage lien. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments.”
The lender is required to document the above and add any monthly amount due in such a payment arrangement to the borrower’s debt ratio. “The Mortgagee must include the payment amount in the agreement in the Borrowers monthly liabilities and debt. The Mortgagee must obtain a copy of the agreement and evidence that payments were made on time in accordance with the agreement.”
As you can see, FHA loan rules don’t automatically rule out a borrower with such an issue on the credit report, but the borrower must not have other patterns of late payments, skipped payments, etc. on top of serious issues such as these. Lender standards and state law also apply.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: