How to Overcome Common Barriers to Mortgage, Part 1: The Public Record

It’s a story I’ve heard a thousand times, “I want to get a mortgage, but….” and then the person tells me a tragic story of a credit problem they believe to be insurmountable. Even though I’m not a Realtor anymore, I still hear it from friends and family members who know I write this blog. I’m always a little sad that people still believe that their credit scars are meant to be carried like some sort of financial Scarlet Letter, when that’s the furthest thing from the truth.

The fact is that we all screw up sometimes. We’ve all had a late pay, a judgment, we’ve maxed out our credit cards or let our student loans go into default. Well, maybe not all of that stuff, but at least one of them. Even my dad, who is meticulous about his credit, had a foreclosure in the early 1980s. It happens. Life gets in the way of our very best intentions more than we like to admit and sometimes we just hit a really long patch of bad luck.

My point is, I think, that no one is perfect, in life or in credit. It’s not what you’ve done in the past that matters, but how you go about rebuilding your life and credit file. So, without any further ado, I’m going to tell you exactly how to fix many of the most common credit woes. If you’ve got something I don’t cover here (or in the other two parts that are coming), feel free to post about it in comments and we’ll see what we can do to get you back on track.

Problems with Public Records

Public records are among the most troublesome types of credit issues. Some can stick with you for as long as 10 years. This is why you should take any judgments, tax liens or bankruptcies seriously — but they don’t have to plague you for life. If you’re already making moves to repair your credit, they’re going to end up being just a bump in the road. Here are the best moves to make if you’ve had the misfortune to have any of these things appear on your credit report:

Judgment. If you’ve ever managed to miss a few payments to a creditor who wasn’t messing around, you’ve probably experienced the joy of a judgment. These are different from collections, which we’ll touch on in part two, but they begin the same — with two or three missed payments and a lot of collection calls.

Depending on the nature of the debt, the creditor may take additional steps to collect from you, but they first have to go to court and get a judgment. These days, medical debt will not typically go to court (unless you’ve already arranged a payment plan with the collection agency and default again), but past due rent, credit cards and deficiencies on secured notes frequently do.

Judgments will stay with you for a very long time (seven or more years, depending on your state), but the good news is that they have less impact the further you get from having satisfied them. That’s the stickler, though — you’re going to have to pay that thing off before your credit can start to heal. If you’ve already missed your window to fight the judgment, then give the courthouse a call. They can often take payments for your judgment or at least put you in touch with the company that’s ready to do so.

One caveat here. Most of the dirtiest of the collection agencies have been completely driven out of existence, but a few remain. So that means that it’s doubly important that you not only keep good records of your payments, but logs of who you speak with, what you discussed and when it happened. You’ll also want a letter that explains you’ve satisfied the judgment entirely once you have — otherwise you could be back on the hook for it all over again if the company handling the money didn’t bother to report it properly.

Bankruptcy. Filing for bankruptcy can be a smart move, don’t get me wrong. If you’re underwater in debt and there’s no way out because something major in your life changed (eg. you’ve developed a major and expensive illness, you lost your job and another one paying equally isn’t forthcoming, you’ve experienced the death or permanent disability of an income-producing spouse), then it’s the best thing you can do to save your credit in the long run. Which chapter you file for is strictly between you and your lawyer, but their long term effects are similar.

Because paying back a portion of your debt is an important part of a Chapter 13 bankruptcy, on paper they seem like they would spend less time on your credit file. This isn’t necessarily true, since they remain for seven years from the date you paid your agreed upon portion. If you can pay your debts in a lump sum, a Chapter 13 bankruptcy will drop off your credit three years faster than other types, but if you have to make payments over time to meet your obligation, a Chapter 13 will be as long of a credit sentence as any other bankruptcy. If you don’t finish making those payments, it’ll stay for a full 10 years. Chapters 7, 11 and 12 generally discharge all or most of your debt at once and they hang around for 10 full years, no matter what.

Now, a word on bankruptcy. Just because you have a bankruptcy doesn’t mean you can’t get a mortgage. But in order to get a decent one, you’ll have to start working on your credit right after your discharge. Typically, you can get another FHA or VA mortgage after only two years, provided you’ve sufficiently rebuilt your credit. This means serious monitoring on your part and aggressive reporting of old credit accounts that continue to try to pop back up. It’s uncommon these days, but again, collection companies aren’t always the picture of integrity.

I don’t normally recommend financial products or services, but when it comes to credit monitoring, you’d better bet I will. There’s no better way to deal with it than to go to the source: Fair Isaac. Their MyFico website and financial products give you an up to date look at your credit file and score. I personally use this site for monitoring (and I’ve tried several) and I recommend you do, too.

Tax Liens. I know you’re a little embarrassed about your tax lien. It’s ok, we’re all friends here. A tax lien, as you know, isn’t a small thing — but it’s not insurmountable, either. It will hurt your credit, just like any public record entry and the longer you put it off, the worse things will be. Luckily, the IRS is becoming a new, friendlier entity — and they’re all about helping you with your tax liens.

Even if you’re making payments as agreed, the tax lien may remain on your credit file — the burden is on you to have it removed, a direct debit installment agreement doesn’t necessarily delete liens. You’ll want to file a Form 12277, Application for Withdrawal. Keep in mind that you have to have a good reason to request this — not wanting a tax lien on your credit file won’t fly. You’ll need to either have a payment plan in place, have worked out an offer in compromise or have extenuating circumstances that may prove the lien to be unfounded.

The Bottom Line: It’s Public, But It’s Not Written In Stone

Having anything in the “Public Record” section of your credit report can be seriously bad news if you’re looking to get a mortgage — but it’s not the end of the world. You will need extra time to clean up whatever sort of problem you have, be it a judgment, a tax lien or a bankruptcy. These things do not go away on their own entirely. Even a bankruptcy can leave you with lots of credit fallout that will require your intervention.

The worst thing you can do is nothing. There are solutions for public record items in your credit file. Remember that the companies who have filed judgments or tax liens against you just want their money, they have no interest in causing you mental anguish over the accounts. I know a lot of people (myself included) are hesitant to contact a collection agency or the tax man to clear up these issues, but I promise you, you’ll feel better once you do.

And, you’ll be one step closer to securing that mortgage! Stay tuned for the next installment of this series, where we’ll discuss how to correct other aspects of your credit file.

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