The good news…..
In 2009 I began teaching a Continuing Education course on the topic of credit repair and credit scoring. In nearly every class there comes the question, “but aren’t tax liens and items of public record more difficult to remove?”. The answer is no – they are no more “sticky” than any other type of bad debt, but guess what – things may be getting easier. The National Consumer Assistance Plan takes effect on July 1, 2017. The plan requires Equifax, Experian and TransUnion to reduce the amount of tax lien data they report. In addition, 96 percent of civil judgment public record data will no longer be included in the consumer credit file reports from the trio of credit reporting agencies. That is according to Donald Clement Jr., the southeast regional sales manager of Credit Plus Inc., where his LinkedIn profile says he’s been employed since 1998. Clement made the comments in a video from Credit Plus entitled America’s Mortgage News. “The bureaus only plan to report tax lien and civil debt information on consumers when three of the four areas of personally identifiable information, otherwise known as PII, are present,” Clement said. “That includes, name, social security number, birth date and address. “And guess what, many of those liens and most judgments don’t include all those data points, in part, because social security numbers are often masked for security reasons.” In addition, courthouse visits are required every 90 days to have the records be included in credit files. No changes, however, are expected to public bankruptcy data. Clement said that a preliminary Experian analysis indicates 96 percent of civil judgment public record data will no longer be included in the reports. Almost half of tax lien information won’t meet PII criteria. “The FICO initial analysis found that roughly 12 million people will see these negatives removed from their credit reports,” he explained. “And as a result, the average American’s credit score will likely push north of 700.” Almost 11 million consumers will likely see a 20-point improvement in credit scores. FICO is reportedly planning on doing a more thorough analysis to determine the impact on credit scores.Source: Mortgage Daily
The bad news…..
Does this mean you can get a mortgage loan if public record items are removed from your credit report? Not so simple. In the process of getting a mortgage loan the credit report is just one of a few different reports used to determine your credit worthiness and the existence of public records. Every property purchased also comes with a title report. The title report checks for judgments and public records on both the seller and the buyer. Just because an item is off your credit report, does not mean it isn’t gone completely. A lien that was filed correctly prior to the proposed closing date has priority over the mortgage loan, therefore, it must be dealt with before closing can occur. Additionally, most lenders use sophisticated supplemental reports like Fraudguard® and LexisNexis® when the loan is submitted to underwriting. These reports scour additional databases to look for public records, divorce decrees, child support orders, previous or concurrent ownership interest in properties and businesses, and a host of other things most of us thought were private. If a tax lien or judgment shows on one of these reports, again, it will have to be dealt with prior to closing.
The good news again….
Government-insured loans will allow some of these items to be “subordinated” to a first mortgage. What does that mean, and how do you do it? First off, FHA, VA and USDA loans are all government-insured or guaranteed and have similar underwriting guidelines when it comes to this stuff. They each use an AUS or Automated Underwriting System to determine initial loan approval status and eligibility. If the findings from AUS indicate, you can approve a loan through one of these agencies with as little as 3 months of payments, but most of the time, by documenting 12 on-time payments to the lien holding creditor. Sooooooo, if you have a tax lien of judgment and have set up a payment plan with them and have been making those payments on time, you may still be able to get a home without having to pay off those bad debts. The title company would prepare and send a subordination agreement to the creditor where they would agree to take second lien position to the mortgage loan. This is a fairly standard procedure if you know where to apply the strategy.
Not long ago I closed a loan for a client who had $26,000 in outstanding tax liens. We got the liens removed from his credit report which allowed him to buy a home with higher than normal debt ratios and credit scores, but the tax liens were still apparent on the title report. This individual had been in a repayment plan to the IRS for over 5 years and had never missed a payment. He was able to produce the necessary documents and we closed his loan with the IRS liens moving into second position behind the FHA first mortgage that we secured to purchase the property. Over the past 28 years I’ve done at least two dozen transactions where this was the case and it is always nice to find a way to work around the system for those people who have gotten into trouble and are back on track.