William's Places: Do Judgments, Liens, Collections, & Charge-Offs Need To Be Paid Before Closing?

Do Judgments, Liens, Collections, & Charge-Offs Need To Be Paid Before Closing?

This could not have been said any better, than from an individual who works to qualify buyers in order to purchase a home. If any of the issues that George refers to applies to you, it is in your best interest to have them resolved quickly so that you can move forward with your home purchase plans.

With Conventional Mortgages becoming more popular in recent months, because of FHA changes and proposed changes, I felt that it would be good to write a blog on a regular obstacle for Conventional Borrowers.  With many people having lost their jobs in recent years, it is not uncommon for them to have during that time acquired Judgments, Liens, Collections, and Charge-Offs.  So a regular question is Do Judgments, Liens, Collections, & Charge-Offs Need To Be Paid Before Closing? The simple and quick answer to that question is YES.  But, and there seems to always be a but, there are some exceptions.

The Fannie Mae Guideline on Judgments, Liens, Collections, & Charge-Offs is as follows.  Delinquent Credit Accounts such as:

  • Taxes
  • Judgments
  • Charge-Offs
  • Liens

That have "the potential to affect Fannie Mae's position or diminish the borrower's equity -- must be paid off at or prior to closing."  However, like I stated above there is a but.  Fannie Mae makes an exception for Collection or Charged-Off Accounts the are less than:

  • $250.00, or
  • If the total cumulative balance is $1,000 or less.

Fannie Mae makes one additional exception for Collections, and Charged-Off Accounts, but this third exception has little chance of getting Underwriting approval these days.  The exception is that if Collections, and Charged-Off Accounts exceed the above limits, they do not have to paid off prior to Closing IF the Borrower(s) can meet the following:

  • Have a strong Credit Profile
  • Sizable liquid reserves
  • Prove that the accounts do not present a threat to Fannie Mae's First Mortgage Lien position
  • Prove that the outstanding balances on the accounts are not likely to affect the Borrower's Equity Position

This third exception will be very hard to prove to the satisfaction of Underwriter the, so good luck.

My advice to anyone who is contemplating on purchasing a home, and has  Judgments, Liens, Collections, & Charge-Offs is to pay them off as soon as possible, because they will also impact their credit scores.  So the rule of thumb to the question Do Judgments, Liens, Collections, & Charge-Offs Need To Be Paid Before Closing? Is YES, and as quickly as possible.



 Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

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Comment balloon 2 commentsWilliam James Walton Sr. • January 28 2013 12:48PM


William thank you for the re-blog.  Missed seeing you in the Rain, hope everything is going well.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 7 years ago

I know this sounds like it should be a pretty automatic answer to a pretty simple question, but it is ALWAYS better to ask your personal loan officer what is best to do.  Although there are many commonalities in each and every situation, there are always differences as well.  Bottom line... no automatics.  Ask your loan officer.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 7 years ago