Waiting to close escrow on your new home is an anxious time. Although you've complied with every request for information from your lender, there's always a chance the escrow agent will call and ask you to bring more money to closing. You may have to pay off an old debt before escrow will close. If that debt is a judgment, your obligation to pay it off before closing escrow depends on the type of the judgment and mortgage for which you were approved.
Generally speaking, there are two types of judgments that a court can enter against you. One is a periodic judgment, such as a judgment for payment of child support or alimony. A debtor pays a periodic judgment over time, with a new payment due every month. Lenders consider child support in computing a borrower's debt-to-income ratio. In most cases, a lender will require you to show that support payments are current as of the date of closing, but will not require you to pay the entire judgment before you close escrow.
Lump Sum Judgment
The other type of judgment is a lump sum judgment that is due as soon as it is entered. A debtor can't pay a lump sum judgment in installments unless the judgment creditor agrees to accept installment payments. A creditor enforces a lump sum judgment by garnishing the debtor's wages or filing a lien against the debtor's property until the judgment is fully paid. If you close on your house with an outstanding lump sum judgment, the judgment creditor could file a lien against your house and start foreclosure actions if you don't pay the judgment.
If your home loan is backed by the government -- for example, an FHA loan -- then you must pay a lump sum judgment in full before closing escrow. The loan underwriter considers a judgment to be a major indication of derogatory credit. Federal loan underwriting guidelines clearly require a borrower to pay a judgment before the lender can fund a loan eligible for FHA insurance. The only exception is where the judgment debtor and judgment creditor agree in writing to a payment plan.
Buying on Contract
You may not have to pay a judgment in full if you are purchasing your home on contract. With a contract sale, the seller of the home is also the lender. In most cases, title to the home does not pass to the buyer until the buyer pays the loan in full. A judgment creditor cannot file a lien on the debtor's house because the house is not titled in the debtor's name. A contract seller may allow you to close on a house sale without paying a lump sum judgment against you.
- Department of Housing and Urban Development: Mortgage Credit Analysis
- The Mortgage Reports: FHA Mortgages -- Common Questions From Borrowers With Bad Credit
- Consumer Financial Protection Bureau. "What Is a Judgment?" Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "What Is a Statue of Limitations On a Debt?" Accessed March 16, 2020.
- Texas Law Help. "What Is an Affirmative Defense?" Accessed March 16, 2020.
- Federal Trade Commission. "Time-Barred Debts." Accessed March 16, 2020.
- The Florida Bar. "The Life of a Money Judgment in Florida Is Limited for Only Some Purposes." Accessed March 16, 2020.
- Virginia Law. "§ 8.01-251 Limitations on Enforcement of Judgments." Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "How Long Does Negative Information Remain on My Credit Report?" Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "What Is a Garnishment?" Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "Can a Debt Collector Take My Social Security or VA Benefits?" Accessed March 16, 2020.
- County of Napa. "Real Property Levy - Writ of Execution." Accessed March 16, 2020.
- U.S. Marshals Service. "Service of Process: Writ of Execution." Accessed March 16, 2020.
- National Association of REALTORS®. "What Is a Property Lien? An Unpaid Debt That Could Trip Up Your Home Sale." Accessed March 16, 2020.
Marilyn Lindblad practices law on the west coast of the United States. She has been a freelance writer since 2007. Her work has appeared on various websites. Lindblad received her Juris Doctor from Lewis and Clark Law School.