Getting a VA home loan can be more challenging if there’s a civil judgment showing up on your credit report. These typically appear after a creditor takes a consumer to court because of unpaid debts.
If you fail to respond to a lawsuit or you lose in court, the judge can order you to repay what you owe. To ensure they get paid, creditors who receive a favorable judgment can attach what’s known as a lien to your home or to your personal property. A lien basically acts as security for your unpaid debt.
Having a judgment or a lien can make it challenging to sell a home, to refinance an existing mortgage or to buy a new house. But it’s not an automatic deal-breaker when it comes to getting a VA loan.
Let’s take a closer look.
Some consumers may be able to pay what they owe immediately or set up a satisfactory payment plan with the creditor.
At Veterans United, we currently require that judgments either be paid in full or the borrower must be able to show a 12-month history of on-time payments. If the judgment isn’t at least 12 months old, a shorter payment history may be acceptable as long as the borrower began a repayment plan immediately after the judgment.
Prospective VA buyers will also need to provide a written letter of explanation regarding the judgment and repayment plan.
Creditors can also ask a court to garnish a consumer’s wages if they refuse to pay a judgment or fall behind on scheduled payments. Garnishment means a portion of what the consumer owes gets taken out of every paycheck until the debt is satisfied.
Borrowers subject to wage garnishment may be able to move forward with a 12-month history of satisfactory payments. Lenders would count the garnishment as a monthly debt when evaluating your affordability situation.
For VA buyers, part of their closing cost negotiations with a home seller can include having the seller pay off a judgment at closing. Generally, the seller would use proceeds from the home sale to satisfy the debt and help the loan close.
The VA allows sellers to pay for all of a buyer’s loan-related closing costs and up to 4 percent of the purchase price in what are known as concessions. Paying off a judgment at closing would count against that cap on seller concessions.
To be sure, having a judgment on your credit report can make the homebuying journey more challenging. Talk with a loan officer if you’re heading into the home purchase with a judgment on your credit report.