FHA and court judgments: payoff rules

What the Handbook means by a judgment

A judgment, in the Handbook's words, is any debt or monetary liability of the borrower created by a court or other adjudicating body. In a community property state it also covers the borrower's spouse unless state law excludes it. The Handbook's concern, visible in the exception below, is the priority of FHA's lien, so a judgment is handled differently from an ordinary debt that is simply added to your DTI.

The basic rule: resolved before or at closing

The lender must verify that court-ordered judgments are resolved or paid off before or at closing. For judgments against a non-borrowing spouse in a community property state, the same standard applies: they must be resolved or paid in full, with the exception of obligations excluded by state law. This applies regardless of the amount. A $400 judgment is treated the same way as a $40,000 one: it has to be resolved, which is a different thing from a collection account, where a threshold applies. The collection accounts page covers that rule.

The payment-plan exception

Paying in full is not the only way to resolve one. A judgment is considered resolved if all of these are true:

• the borrower has a valid agreement with the creditor to make regular payments;
• the borrower has made timely payments for at least three months of scheduled payments;
• the judgment will not supersede the FHA-insured mortgage lien; and
• the borrower did not prepay scheduled payments to reach the three-month minimum.

The lender must include the payment amount from the agreement in the borrower's monthly liabilities or DTI, and must obtain a copy of the agreement and evidence that payments were made on time. For example, a $9,000 judgment with an agreed $150 a month: after three on-time $150 payments, and with no priority over the new lien, it is resolved, and $150 is added to your monthly debts. Paying $450 in one lump in month one does not count as three payments.

The reason for what is asked

The Handbook conditions the payment-plan route on the judgment not superseding the FHA-insured lien, which shows the concern is the priority of that lien. The documentation list reflects this: evidence of payment in full if paid before settlement, a payoff statement if paid at settlement, or the payment arrangement with the creditor if not paid before or at settlement, together with a subordination agreement for any liens existing on title.

Explaining how it happened

In manual underwriting the lender must also determine whether the judgment resulted from disregard for financial obligations, an inability to manage debt, or extenuating circumstances, regardless of the amount. If the judgment followed an event beyond your control, document it; the extenuating circumstances page covers what the Handbook accepts.

Practical steps

Search court records for judgments before you apply, and ask the title company about liens. If you plan to use a payment plan, start it at least three months before applying and do not accelerate payments. If you can pay in full at settlement, get a payoff statement. Then include the plan payment in the DTI calculator. Disputed items follow a separate rule on the disputed accounts page.

Sources

• HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, Update 18 PDF: Underwriting the Borrower Using the TOTAL Mortgage Scorecard, Judgments (TOTAL), Handbook pp. 207-208; Manual Underwriting of the Borrower, Judgments (Manual), pp. 291-292. Read November 2, 2026.
• HUD, Single Family Housing Policy Handbook 4000.1 information page. Read November 2, 2026.

Text read: HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, the clean Update 18 PDF that HUD links from its Handbook 4000.1 information page (HUD lists it as the August 12, 2026 update). Confirm current requirements with an FHA-approved lender, who may apply stricter standards of its own. This page paraphrases the Handbook and does not replace it. Page numbers cited are the Handbook's own and may be approximate; use the section headings to locate the text.