|Factors that can put loans in peril
A judgment is a court-ordered nightmare that can make getting a mortgage loan much more stringent than it otherwise needs to be if not handled correctly.
Concerning judgments, here are some quick terms you’ll need to know:
• Judgment: A court-ordered debt that can arise from a number of factors such as a lawsuit, a divorce, business dispute…just to name a few. Judgments are public record. They also show up on your credit report and can adversely affect your credit score.
• Garnishment: This is the enforcement of the judgment. Commonly, when a judgment is in the picture, a wage garnishment or bank levy will be in place.
A mortgage lending company is going to thoroughly scrutinize the events that led to the judgment. More importantly, emphasis will be on how the judgment will be resolved in relationship to mortgage approval. Either buying a house or refinancing one, the judgment will be reviewed in the same fashion. The underwriter (decision maker) is looking for any potential signs of disregard for financial obligations or possible signs of blatant inability to manage debts. Why is this important? Repayment becomes especially crucial because the lender is inherently probing for future default risk of the credit they are issuing.
How judgments work
in home lending
If there are open judgments or garnishments identified in the public records section of the credit report, then the liability needs to be paid off by or prior to the close of escrow.
• Lending exception: As an exception to the consumer having to pay off the judgment in full, an agreement with the creditor to make timely and regular payments must be in place. The consumer will need to provide a copy of the written agreement with the last six months of timely payments made prior to the official mortgage loan approval. Additionally, a consumer cannot prepay future months’ payments in lieu of the payment history criteria. There has to be a consistent payment history for a six-month period of time. Lastly, the monthly payment amount must be accounted for in qualifying for the loan, which will reduce borrowing power as the debt increases the consumer’s debt to income.
your borrowing power
The debt to income ratio is a method lenders use to measure how much of your income is allocated for paying financial obligations. The more percentage of the income that goes to financial obligations, the more challenging it can be to get a mortgage. Conversely, the higher amount of income left over after paying obligations, the better.
Take a consumer who earns $10,000 in monthly income looking to borrow $400,000. Let’s assume this consumer’s mortgage payment will be approximately $2,800 (including principal, interest, taxes and insurance and PMI). Let’s also assume they have a $500 car payment and $200 per month in minimum student loan payments.
If this consumer has no judgment or wage garnishment, then this consumer would have a strong debt to income ratio of 35 percent, meaning that 65 percent of their income is left over after all the obligations are considered ($2,800 mortgage payment plus $700 car loan/student loans divided by $10,000 monthly income equals 35 percent).
If this same consumer has a judgment for $20,000 and the monthly payment for the last six months has been $600 per month, then the same calculation method is used ($2,800 mortgage payment plus $700 car loan/student loans plus $600 monthly repayment on $20,000 judgment divided by $10,000 monthly income equals 41 percent).
The $600 per month payment on the judgment debts translates 6 percent of the monthly income, a big number considering most lenders allow a maximum debt ratio of 45 percent.
Cash or income to
offset the judgment
If you have the financial means and can take a portion of your available cash on hand to pay off the judgment in full, thus removing future payment obligation, the better. If cash is tight, an alternative is debt servicing the credit obligation with income. In order to accomplish this feat, expect at least 55 percent of your income to be left over after paying wage garnishment/judgment liability, mortgage payment as well as any other consumer obligations such as personal loans, credit cards, auto loans, alike.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.