The FHA loan program is one of the more lenient mortgage programs in today’s mortgage marketplace as it relates to credit and other qualifying factors, especially when compared to other low-down payment conventional mortgages. FHA debt to income ratios for example can be a bit higher given other positive data in the loan file. And lenders appreciate the FHA program as well, especially given the government-guarantee associated with the FHA loan program. Should an FHA loan ever go into default, the lender is compensated for the loss as long as the original loan was approved using proper FHA guidelines. In regards to credit and credit scores, there can also be exceptions made for an approval. Not in every case, but in many. Even if a borrower has a judgment listed in a credit report.
There are two primary types of judgments. One where the borrower has a legitimate argument with the creditor and the creditor takes the individual to court to settle the claim. The borrower disagrees with the creditor but the judge agrees with the creditor and a judgment against the borrower is filed as a public record. The other situation regarding a judgment is that the borrowers do understand there is a legitimate outstanding balance but simply cannot pay the balance due.
A judgment is typically an action of last resort when seeking to obtain what is owed. When a consumer misses a due date within a few days or maybe a couple of weeks, the only harm is probably a late payment fee but a payment of this nature won’t show up on a credit report. Only payments that are made more than 30 days past the due date are listed. So too are payments that are listed more than 60 days past the due date, 90 days and 120 days. Of course, the further out the late payments are the more the credit scores are affected.
When a creditor fails to collect payments from a borrower and collection efforts fail, the account then moves to a “collection” status. When an account falls into collection, scores fall further still. At this stage, the creditor’s collection department takes over and the account is closed and the borrower can no longer use the account. The creditor can keep the account into collection until it feels the borrowers simply won’t pay and they halt further collection efforts. The borrower is then notified of a pending lawsuit if the account isn’t settled. If no further communication or payments are made the creditor will then file a suit and set a court date. If the judge agrees the claim is warranted and all efforts have been made to collect, a judgment will be issued and recorded in the county where the court is located. Credit reports contain not just payment histories but also public records.
But that doesn’t necessarily mean someone with a judgment can no longer obtain financing to buy a home. It’s a bit difficult, yes, but not impossible. A judgment stays on a credit report for seven years from the filing date and even longer than that if the creditor can have the judgment refiled. With a judgment, a creditor can seize bank accounts or recover a borrower’s assets. Someone with a judgment for example could go to an ATM to withdraw funds and discover there is no money in the account. Some might even consider a judgment to be more harmful to a credit file than a bankruptcy filing. With a bankruptcy, all dischargeable debt disappears and after one or two years with reestablished credit someone can apply for a mortgage.
So how does someone get an FHA loan with an outstanding judgment? The obvious choice is to simply pay off the outstanding judgment. In this instance, the lender will still want to know why the account went that far into collection that the creditor had to sue to get paid. If the borrowers can show it was a disagreement and provide some sort of documentation to back up the claim, the lender might make an exception and approve the loan application.
The other way to obtain an approval for an FHA loan with an outstanding judgment is to make payment arrangement with the creditor. The borrower must be able to provide sufficient documentation the creditor has agreed to a repayment plan and provides terms of the plan. In addition, there needs to be documentation that at least three payments have been made on time to creditor under the plan.
Borrowers need to be clear that just because the FHA program makes allowances for a judgment it’s still up to the individual lender to make the call. In many such cases for example if the account that went into collection and ultimately resulted as a judgment where the creditor is for medical issues, the lender might be more inclined to approve the application. If on the other hand if the judgment is just one of several derogatory items in a credit file, it will be difficult to convince the lender the offending item was an anomaly and not a pattern. If the judgment is isolated, there is an explanation letter in the file and three consecutive payments have been made, then an FHA application might very well receive an approval.