Must the borrower pay off a judgment against a non-purchasing spouse in a community property state?

Judgments of a non-borrowing spouse in a community property state must be resolved or paid in full, with the exception of obligations excluded by state law. A Judgment is considered resolved if the Borrower has entered into a valid agreement with the creditor to make regular payments on the debt, the Borrower has made timely payments for at least three months of scheduled payments and the Judgment will not supersede the FHA-insured mortgage lien. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments.  The payment amount in the agreement must be included in the Borrower’s monthly liabilities and debt.   The lender must obtain a copy of the agreement and evidence that payments were made on time in accordance with the agreement. 

The lender must provide the following documentation: 
•     evidence of payment in full, if paid prior to settlement; 
•     the payoff statement, if paid at settlement; or 
•     the payment arrangement with creditor, if not paid prior to or at settlement, and a subordination agreement for any liens existing on title.  

For additional information see Handbook 4000.1 II.A.4.b.iii.(D); II.A.5.a.iii.(G) at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.


Topic Number: KA-04905