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

This is good advice here in California as well, though I'd add that you can avoid paying off some things by having a loan officer pull your credit and see how it appears in an actual home loan credit pull, versus the "consumer credit pull" that you will see if you check your credit yourself.  

The consumer credit pull will also likely be quite a few points higher in terms of your number score, versus the home loan credit pull.  We've seen consumer credit coming in at 650, but the home loan credit pull show 600 FICO.  

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

Lisa Delzompo (951-704-4559)

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Comment balloon 3 commentsLisa Delzompo 951-704-4559 • January 28 2013 08:09AM


You make an interesting point. On the flip side, for a seller with these issues, it is better for the title agency to obtain official letters and make the payments. Too many cases where a "too recent" payment hasn't posted with the desired effect to clear title conditions. Being proactive as a buyer is crucial though!

Posted by Rebecca Lee McAnallen, Big city experience, small town service (RGS Title, LLC ) over 7 years ago

Good reponse by Rebecca on this issue.  Thanks for sharing your blog.

Posted by Edward & Celia Maddox, EXPERIENCE & INTEGRITY - WE TAKE THE HIGH ROAD (The Celtic Connection Realty) over 7 years ago

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.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) over 7 years ago

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