You may have wondered: what is a judgment lien? When a borrower cannot repay a creditor, they may be required to turn over their home to the creditor for failing to adhere to the payment agreement. The lien acts as an added security measure for the creditor, allowing them to take control of the property from the person who has failed to pay them.
A lien can impact a person’s ability to buy a home. A home with a lien cannot be sold until the lien is removed, and this inability to sell a home is sometimes referred to as having a “cloud” on the title. Once the borrower pays off the debt, the lien is removed.
How Does a Judgment Lien Work?
When a borrower cannot or will not pay back a creditor, the creditor can sue them in court for the balance owed. If the court rules against the borrower, the creditor can file a judgment lien against them. This type of lien is considered “nonconsensual” since it is attached to a property without the consent of the owner.
In most states, the creditor must record the lien via a state or county filing. In some places, the lien is automatically entered on any real estate the creditor owns in the jurisdiction. Once a lien is filed, it will be placed on the debtor’s real or personal property. Real property includes real estate. A lien can only be placed on a property a debtor owns—any property their spouse owns is exempt. A lien can also be placed on future property acquisitions.
Obtaining A Mortgage If You Have A Judgment Against You
Judgments, including liens, are public records, and they can also cause significant damage to your credit score. Since your ability to obtain a loan depends heavily on your credit score, a lien on your record can make it hard to get a mortgage and purchase a new home — unless you take certain steps.
When you apply for a mortgage, the lender will want to know the circumstances of your judgment. Lenders will seek out any possible signs of poor money or credit management — this helps them weed out borrowers who may potentially default.
The easiest way to secure a mortgage when you have a lien against you is to pay off the lien. In reality, it is the only way. Banks and mortgage lenders will have trouble approving your application if you haven’t satisfied your debt. In some states, you may be able to get a partial lien release letter from the institution you owe money. Unfortunately, this option is not available in all states, and even if it is, it may still not be enough to get approved for a mortgage.
Discharging a Lien
A debtor must satisfy a lien before it can be removed. The first way of doing this is to pay off the debt owed. If a debtor pays what they owe, the lien can be removed. The debtor will simply have to file a release in the same jurisdiction the lien was recorded in. The second way of satisfying a lien is to file for bankruptcy.
However, a lien can be discharged in bankruptcy only under certain circumstances:
There Is a Money Judgment
A lien derived from a court-issued money judgment may be eligible for discharge via bankruptcy.
There Is an Exemption
The debtor is entitled to claim an exemption on at least some of the equity in their property.
There Would Be a Loss
The lien would cause the loss of some or all of the debtor’s exempt equity.
Securing a Loan Once You Satisfy Your Lien
Once you satisfy your lien and your title is clear, you may apply for a mortgage. Most mortgage lenders will expect you to have a decent credit score, but there are home loans available for individuals with lower credit scores. While conventional loans typically require a credit score in the 600s or higher, nonconventional loans make an exception to the rule.
The Associates Home Loan of Florida, Inc. works with borrowers facing challenged credit and nontraditional financial backgrounds, so please don’t hesitate to reach out to us to find out what you qualify for.
Nonconventional loans are ideal for buyers with lower credit scores and those who don’t have a sizeable down payment to put forth.
An FHA loan, backed by the Federal Housing Administration, is one such loan. Since these loans are backed by the federal government, approving a borrower with a lower credit score isn’t such a massive risk to lenders. Buyers can be approved for an FHA loan with a credit score as low as 500 and a down payment as low as 3.5%. Like other loans, the higher your credit score, the lower your down payment. If you have at least a 580, you can put down as low as 3.5%.
You may also qualify for a subprime loan if you have bad credit, and you may be eligible for one if you have a credit score below 660. Although these loans have higher interest rates, these rates are becoming increasingly competitive.
Loans based on a property’s value instead of a borrower’s credit history are called hard money loans. These mortgages are often temporary and are primarily granted to borrowers or investors flipping homes until their credit score improves. These loans have higher interest rates than conventional ones, but they can be a good option if you are interested in flipping a property.
What Is a Judgment Lien and How Does it Affect Your Homebuying Ability?
Associates Home Loan serves clients in Tampa, Sarasota, Orlando, and surrounding areas. If you are interested in learning how to purchase a home with a judgment lien on it, or if you currently have a judgment and want to purchase a home, we can help. We take pride in helping clients with unique credit challenges, so we work with a variety of lenders to offer flexible repayment terms and competitive rates. Get in touch with us today to find out how to deal with any judgment lien you have and the next steps toward buying your dream home.