If you have an open judgment on your credit report, it could become a problem if you're applying for a refinance or purchase home loan. Today's lending environment is much tougher than in years past, so any derogatory credit items can definitely cause some issues. However, if you have a judgment on credit, don't automatically assume you're locked out of a new mortgage. It is possible to get a home loan with a judgment on credit, it just depends on the circumstances and the type of loan you're seeking.
Judgments are reported under the public record section of your credit file where bankruptcies, foreclosures, deeds-in-lieu of foreclosure, and tax liens are also reported. Lenders consider the presence of a judgment very high risk, so don't be surprised if it pulls down your credit scores and is aggressively scrutinized by lenders.
In most cases, the mortgage lender will want you to clear the judgment before the loan can be closed. However, there are some circumstances where it can remain open after the loan is done, but it depends on the type of loan you're seeking.
There are two main types of financing in today's mortgage lending marketplace: Fannie Mae conventional and FHA-insured financing. Judgments are handled differently under the guidelines for each, as follows:
1) Conventional guidelines are more stringent than FHA, so plan on having the judgment cleared by loan closing if you want to go for a conventional loan. It appears the official Fannie Mae guidelines allow for the possibility of using a cash out refinance to pay off the judgment, but the bank you're working with may not.
2) FHA guidelines are little less restrictive, so it's possible you could get an approval with an open judgment. However, it's largely up to the discretion of the bank you're working with. Some banks may want the judgment closed before the loan is finished, others may allow it to stay open. Those that allow the judgment to remain open may require that you document a payment plan and show proof you've been making the payments on time. If the judgment does need to be paid and closed, ask if a cash out refinance to pay the judgment is a possibility.
Though the above are the standard guidelines for FHA and Fannie, note that many banks may add their own more restrictive guidelines as well. Just because FHA may allow a judgment to remain open at loan closing, it doesn't mean the bank you're working with will.
If you know you have a judgment in your credit file, the best course of action is to get it cleared up before you apply for a loan. That way you won't need to deal with the associated headaches and your credit scores will be much stronger - which can make for a much better mortgage deal.
It's not as easy to get a loan as in years past, so you want to remove as many obstacles as you can to getting your loan approved.
Judgments are reported under the public record section of your credit file where bankruptcies, foreclosures, deeds-in-lieu of foreclosure, and tax liens are also reported. Lenders consider the presence of a judgment very high risk, so don't be surprised if it pulls down your credit scores and is aggressively scrutinized by lenders.
In most cases, the mortgage lender will want you to clear the judgment before the loan can be closed. However, there are some circumstances where it can remain open after the loan is done, but it depends on the type of loan you're seeking.
There are two main types of financing in today's mortgage lending marketplace: Fannie Mae conventional and FHA-insured financing. Judgments are handled differently under the guidelines for each, as follows:
1) Conventional guidelines are more stringent than FHA, so plan on having the judgment cleared by loan closing if you want to go for a conventional loan. It appears the official Fannie Mae guidelines allow for the possibility of using a cash out refinance to pay off the judgment, but the bank you're working with may not.
2) FHA guidelines are little less restrictive, so it's possible you could get an approval with an open judgment. However, it's largely up to the discretion of the bank you're working with. Some banks may want the judgment closed before the loan is finished, others may allow it to stay open. Those that allow the judgment to remain open may require that you document a payment plan and show proof you've been making the payments on time. If the judgment does need to be paid and closed, ask if a cash out refinance to pay the judgment is a possibility.
Though the above are the standard guidelines for FHA and Fannie, note that many banks may add their own more restrictive guidelines as well. Just because FHA may allow a judgment to remain open at loan closing, it doesn't mean the bank you're working with will.
If you know you have a judgment in your credit file, the best course of action is to get it cleared up before you apply for a loan. That way you won't need to deal with the associated headaches and your credit scores will be much stronger - which can make for a much better mortgage deal.
It's not as easy to get a loan as in years past, so you want to remove as many obstacles as you can to getting your loan approved.
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Do credit inquiries really hurt my credit? Borrower beware, there's a lot of misinformation out there about this topic! Also check out: What is LTV?, and why is it important for mortgage qualifying?