Based on the information that’s before the lender, it appears that the home loan applicant previously borrowed from another entity and ultimately welshed on the deal, but in fairness we all know that may or may not be the case.

Judgments can be a bit complicated and lenders want to give mortgage applicants the benefit of the doubt. But they must also manage risk, and insist on accountability when loaning hundreds of thousands of dollars. Consequently, most lenders will embrace one of three approaches:
1) Refuse to loan money to anyone with an unpaid judgment, or a recently paid judgment; 
2) Agree to make the loan only if the judgment is paid, vacated, cancelled or in some way satisfied (settled), at or prior to closing; or, 3) Agree to fund the loan if payment arrangements are made, and three (3) to twelve (12) consecutive on-time payments have been made to the creditor (one lump some remittance sufficient to cover 3 – 12 months of payments is not acceptable). 

Here’s how it plays out with each of the major loan programs:

Conventional: The judgment has to be paid, vacated, cancelled or in some way satisfied (settled), at or prior to closing. Depending on the circumstances, and the borrower’s approach, this can take time. Often more time than the borrower may have during the typical home purchase escrow period.

FHA, VA & USDA: When applying for a government loan (FHA, VA, or USDA), it’s important to note that if the judgment arose because of a failure to pay a federal debt, it’s probably a disqualifying event. Names of those defaulting on federal debts are entered into CAIVRS (Credit Alert Verification Reporting System). It’s a database that houses the names of anyone who has a delinquent federal debt or an outstanding child support obligation. 

The judgment has to be paid at or prior to closing; OR, the borrower can make payment arrangements. If the borrower chooses to make payment arrangements, the amount paid will be included in the borrower’s debt-to-income ratio. In addition, most lenders will require a minimum of three (3) to twelve (12) on-time consecutive payments before closing. This varies by lender. The borrower cannot make a lump sum payment sufficient to cover the required number of consecutive payments, instead the payments must be made monthly, in the month due.

For example, if the agreed installment payment is $300 per month, the borrower cannot make a $900 payment on February 1st and designate that payment to cover the months of February, March and April. Instead there must be a $300 payment on the agreed day in February, $300 in March, and $300 in April. As such, if payments were due on the first of the month it would take a minimum of 60 days to properly document three payments, in addition to the time required to negotiate the payment arrangement and reduce it to writing. If purchasing a home in today’s super competitive marketplace, this may be more time than the borrower has in their escrow period. This principle would also apply to a 12 month payment history requirement.

SLG’s Specialty Loan Products:  Judgments must be paid, vacated, cancelled or in some way satisfied (settled), at or prior to closing.