FHA home loan rules for lenders includes step-by-step instructions on what to do in certain cases where negative credit information is on a borrower’s credit report. This includes judgments, which are described in the FHA Lender’s Handbook as follows:
“Judgment refers to any debt or monetary liability of the Borrower, and the Borrower’s spouse in a community property state unless excluded by state law, created by a court, or other adjudicating body.”
The rules on judgments won’t apply to all borrowers, but for those who are concerned about judgments, the following information will come in handy when trying to decide whether or not now is the right time to commit to an FHA mortgage loan or FHA refinance loan.
What do you need to know about judgments and how they can affect FHA home loan approval? For starters, let’s look at what the FHA Lenders’ Handbook says about them:
“The Mortgagee must verify that court-ordered Judgments are resolved or paid off prior to or at closing.”
That is a good indication to the borrower that a judgment is not an automatic barrier to loan approval. But there is more to the rule than meets the eye-resolution of a judgment does not necessarily entail paying the entire amount off in full before the loan closes.
“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.”
However, the rules are quick to point out that the three payments must be made once per month for the three-month minimum; they cannot be pre-paid up front in one lump sum.
What’s more, the lender is responsible for making sure the arrangement is working out for both borrower and creditor.
“The Mortgagee must obtain a copy of the agreement and evidence that payments were made on time in accordance with the agreement.”
In cases where a payment plan has been made and is satisfactory to the creditor and meets the FHA requirements, the amount of such monthly payments will be included in the borrower’s debt-to-income ratio.
Remember that these are FHA loan requirements and not individual lender standards, which may apply above and beyond the rules listed here. You will need to ask the lender what may apply in addition to the FHA loan rules quoted above.
