Can You Buy a House With a Judgement Against You?

Buying a house is a significant financial undertaking. For individuals with a judgment against them, the process presents unique challenges. A judgment is a court order requiring one party to pay a monetary amount to another. While a judgment complicates real estate transactions, it does not always make a home purchase impossible. Understanding how judgments impact property ownership, financing, and legal processes is important for navigating these complexities. This article explores the implications of judgments and outlines potential avenues for prospective homebuyers.

The Nature of a Judgment and Its Real Estate Implications

A civil judgment originates from a court’s final decision in a non-criminal legal dispute, such as unpaid debts, contract breaches, or personal injury claims. This court order mandates that the losing party, the judgment debtor, pay a specified sum to the winning party, the judgment creditor. Once issued, a money judgment can become a lien on the debtor’s real property. To establish this lien, a certified copy of the judgment is typically recorded in the public records of the county where the debtor owns real estate. This recording transforms the judgment into a general lien, meaning it attaches to all real property owned by the debtor within that specific county.

This lien also attaches to real property acquired by the debtor after the judgment is recorded in that county. The judgment lien serves as a legal claim against the property, securing the debt until satisfied. It publicly notifies anyone interested in the property that a financial obligation exists, which can prevent the property’s sale or refinancing until the debt is settled. While judgments historically appeared directly on credit reports, major credit bureaus largely stopped including most civil judgments after 2017.

Despite this change, the underlying financial behaviors that led to the judgment, such as unpaid debts or collections, can still indirectly harm a credit score. Lenders and other financial institutions can still discover judgments through public records searches, which remains a factor in assessing financial reliability. The primary concern for real estate transactions is the judgment’s status as a lien, rather than its direct appearance on a credit report. This lien is a direct encumbrance on the property itself, signifying a legal claim that must be addressed.

Impact on Mortgage Qualification

A judgment significantly influences a borrower’s ability to obtain a mortgage. Lenders perceive unpaid judgments as indicators of increased financial risk, complicating the loan approval process. The underlying debt and public record of the judgment still factor into a lender’s risk assessment.

The debt-to-income (DTI) ratio is a crucial metric for mortgage lenders, comparing monthly debt payments to gross monthly income. If a judgment involves ongoing payment obligations, these payments are included in the DTI calculation. A high DTI ratio, generally exceeding 36% to 43% for many conventional loans, can lead to denial. Some lenders may accept higher DTIs, up to 50% or even 56.9% for FHA loans with compensating factors.

Mortgage lenders typically require judgments to be satisfied or resolved before approving a loan. For conventional loans backed by Fannie Mae and Freddie Mac, the judgment usually must be paid in full at or before closing, and lenders often require a satisfaction of judgment document. Conventional lenders generally do not permit payment plans for judgments.

However, government-backed loans, such as FHA and VA loans, offer more flexibility. For FHA loans, a judgment is considered resolved if the borrower has a written payment agreement, has made at least three months of on-time payments, and the judgment will not supersede the FHA-insured mortgage lien. VA loans have similar guidelines, allowing for payment plans with a longer history of on-time payments, typically 12 months.

Ensuring Clear Title for Purchase

For a real estate transaction to proceed smoothly, the property must have a “clear title.” A clear title signifies that the property is free from any liens or claims that could question legal ownership. Judgments, when recorded as liens, create a “cloud on title,” indicating an outstanding claim against the property. This cloud must be removed to ensure clear ownership can be transferred.

Title companies play a central role by conducting comprehensive title searches. These searches identify any existing liens or judgments that could affect the property’s title. If a judgment lien is discovered, it must be addressed and cleared before the title company will issue title insurance. Title insurance is almost universally required by mortgage lenders to protect their investment against future claims.

Even if a home is purchased with cash, a judgment lien on the property remains a liability. If not cleared, the lien would attach to the property, potentially making the new owner responsible for the debt or complicating any future sale or refinancing. The lien effectively follows the property, not just the original debtor. Therefore, ensuring clear title is paramount for both financed and cash transactions to protect the buyer’s investment.

The presence of a judgment lien means the property cannot be sold or refinanced until the lien is satisfied. This emphasizes that while a judgment is against a person, the resulting lien impacts the property itself, making its resolution a prerequisite for a clean transfer of ownership.

Addressing a Judgment During Home Purchase

When a judgment surfaces during the home buying process, taking proactive steps to resolve it is important for a successful closing. The most direct approach is to satisfy the judgment in full, paying the entire amount owed to the judgment creditor, including any accrued interest and legal fees. Upon full payment, obtain a “satisfaction of judgment” or “release of lien” document from the creditor or court. This document confirms the debt is settled and the lien removed, and it must be officially recorded where the original judgment lien was filed.

In some situations, particularly if the judgment is older, it may be possible to negotiate a settlement for a lesser amount. This negotiation should result in a written agreement outlining the terms and the creditor’s commitment to release the lien upon payment. Having legal counsel involved can be beneficial, especially for complex judgments, to ensure terms are fair and legally binding.

After a settlement or full payment, verify that the satisfaction or release documents are properly recorded. This ensures the public record reflects the judgment’s resolution, allowing for the transfer of clear title and the issuance of title insurance. These actions are typically required before or at the closing of the home purchase, as lenders and title companies will not proceed until the judgment lien is cleared.