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

Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

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

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Old Saybrook, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or


Re-Blogged 7 times:

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  1. Lisa Delzompo 951-704-4559 01/28/2013 12:09 AM
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Lora "Leah" Stern 914-772-4528
Coldwell Banker, 170 N Main Street, New City NY 10956 - New City, NY
Real Estate Salesperson

George, thanks for sharing this info and updating us on Fha exceptions.

Jan 28, 2013 12:59 PM #33
Fred Griffin presently on Leave of Absence
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

George, great information on a troubling, sometimes complicated, and often confusing situation.  Thank you!

Jan 28, 2013 01:25 PM #34
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

George - Unfortunately, I've seen payoffs of old judgments and collections effect the credit scores.  What are your thoughts on that?

Jan 28, 2013 01:47 PM #35
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

George, great informative post. Though at times, I have seen consumers putting the said charges in 'dispute' and surprisingly, some lending institutions would accept that. Is that correct for most lenders - including FHA?

Jan 28, 2013 02:03 PM #36
Steve Warrene
Your Town Realty - Lower Burrell, PA
Pittsburgh Real Estate Investment Specialists

Alot of our buyers are using FHA nowadays.  This is good information we can share with people from the beginning.

Jan 28, 2013 06:57 PM #37
Sharon Harris
Keller Williams Keystone Realty - Hanover, PA

Good to know. But it is important for the buyers of today to pay everything on time and take care of all the goasts in the closet.

Jan 28, 2013 09:31 PM #38
Sharon Parisi
United Real Estate Dallas - Dallas, TX
Dallas Homes

George, this is another great post for consumers! Many do not realize how connected all financial and legal  information is on their credit reports.

Jan 28, 2013 10:58 PM #39
Sylvie Stuart
Realty One Group Mountain Desert 928-600-2765 - Flagstaff, AZ
Home Buying, Home Selling and Investment - Flagsta

Great blog for information for buyers that can save a lot of headache later!

Jan 28, 2013 11:29 PM #40
Travis "the SOLD man" Parker; Associate Broker
Team Linda Simmons, Enterprise, AL 36330 - Enterprise, AL
email: / cell: 334-494-7846

Good info and good advice. I always tell them the same thing as well. If they have a problem paying off $1,000 worth of debt in a month or so, they may need to rethink home ownership.

Jan 29, 2013 01:38 AM #41
Paddy Deighan JD PhD - Vail, CO
Paddy Deighan J.D. Ph.D

thank you for the timely update on an important topic..of course the lien holders can release the lien temporarily (as in the case of the IRS) to get the loan done..

Jan 29, 2013 07:39 AM #42
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

Timely and useful information and from others too. Learning and earning in the AR.

Jan 29, 2013 07:42 AM #43
Bob Miller
Keller Williams Cornerstone Realty - Ocala, FL
The Ocala Dream Team

Hi George great post to clarify a topic we asked very often by buyers.

Jan 29, 2013 07:17 PM #44
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

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.

Feb 03, 2013 07:52 AM #45
John G. Johnston
John G. Johnston & Associates, LLC - Westcliffe, CO
An Exclusive Buyer's Agent ~ Westcliffe, CO

George  Always good to hear sound advice.  Here's hoping people listen to what is important to protecting their credit.  Thanks for sharing

Feb 03, 2013 12:17 PM #46
David Grbich
Realty One Group - - San Juan Capistrano, CA
Orange County Real Estate - 949-500-0484

Great advice - I have had buyers on short sales pay for many seller indulgences that became liens. Regards Dave

Feb 03, 2013 12:46 PM #47
Pat & Steve Pribisko
Keller Williams Greater Cleveland West - Westlake, OH

George, this is an excellent blog.  So many buyers do not understand that anything derogatory in their credit reports can affect their ability to quality for a loan.

Feb 03, 2013 09:07 PM #48
remax noc - Yorba Linda, CA

Thank you for a great and informative information.

Feb 03, 2013 11:31 PM #49
Annett T. Block
NextHome Connect Realty - Fort Lauderdale, FL
Your NextHome in Fort Lauderdale Beach

Great information George.

In this market the best bat is to have everything in order before you even apply for any loan. I send my clients first for pre-qualification and there should show up any issues that needed to be taken care off before we would move forward.


Feb 28, 2013 04:39 AM #50
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI

Our recent economic recession has branded a large part of the Buyers pool with these type of problems and these problems hinder their ability to buy.

May 22, 2013 12:11 AM #51
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

George, every time I have seen one of these on a buyer's credit, somehow or other they had to remove it... or no loan approval.  I have never done any "exotic" loans, though, so I don't know if any of the the fringe financing allows it.  I would guess not.

Who would want to lend mortgage money to a borrower who has shown they cannot repay what they borrow?

May 23, 2013 03:58 AM #52
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