Dear Liz: My credit reports don’t show any of my old unpaid collection accounts. I also have one judgment that is not showing from 2005. My wife (who has perfect credit) and I are looking to apply for a mortgage. What will the lender find? I recently applied for a credit card to start rebuilding my credit. The issuer approved me for a card with a $1,000 limit and told me my score was in the high 700s. I am so confused.
Answer: If your collection accounts are older than seven years, your lender shouldn’t see them when it reviews your credit reports. Most negative marks have to be dropped from reports seven years and six months after the date the account first went delinquent. Civil judgments also have to be dropped after seven years unless your state has a longer statute of limitations; in that case, the judgment can be reported until the statute expires. California’s statute of limitations for judgments is 10 years.
If none of those negative marks shows on your reports and you’ve handled credit responsibly since then, your credit scores (you have more than one) may well be excellent.
Since you’ll be in the market for a major loan, you and your wife should get your FICO scores from MyFico.com. Mortgage lenders will look at all six scores (one from each of the three credit bureaus for you and your wife), basing your rate and terms on the lower of the two middle scores. If that score is 740 or above, you should get the best rate and terms the lender offers.
Your FICO scores will cost $20 each, which is a bit of an investment. You can get free scores from various online sites, but those aren’t the FICO scores that mortgage lenders use and are of limited help in understanding what rate and terms you’re likely to get.
I am a former loan officer and my wife is currently a FHA/VA mortgage underwriter for a bank. Please read on.
There was a major point that was missed in the columnists answer.
The law says you “MUST” disclose “ALL” judgments’ to the lender on the mortgage application (Form 1003). You will be asked a question about this or any other judgment in Section VIII, Question One of the application. It is a Federal Felony to make false statements on a loan application.
99% of lenders will require the judgment be satisfied prior to closing. The 1% that won’t will expect a very high interest rate. Somewhere in the sub-prime range. The rare exception is if you have been following a pre-arranged payment plan with the judgment’s plaintiff. The mortgage lender will usually require you to show a written agreement between you and the plaintiff and minimum of 1 – 2 years of such payments and a significant portion of the judgment being paid.
DO NOT check “NO” in this box just because the judgment isn’t showing up on your credit report. That is MORTGAGE FRAUD. This goes for IRS liens and Federal Student Loan debt in default, as well. Those must be listed in the liabilities section. Question 4 in Section VIII of the 1003 form.
The reason that lenders will require payment is that IRS liens, student loan defaults and judgments automatically takes a first position to the mortgage being sought. So if you don’t make your payments, the bank has to satisfy the government and or the plaintiff to get a clear title on the house.
Last, during the background search the lender will most likely find the judgment. People used to be able to get away with this, but data mining has made hiding these things next to impossible and the mortgage lenders are watching like a hawk now.
All this being said, you are best to try to apply for the loan with her credit and income only, as long as she wasn’t named as a defendant in the original lawsuit/judgment.