A judgment is a legal decision issued by a judge ordering you to pay money for an unpaid debt or for other damages stemming from a lawsuit. It is highly unlikely that a bank or mortgage company will allow you to refinance with an outstanding money judgment listed on your credit report. However, with some creativity, you may be able to satisfy the judgment as part of the refinancing.
Flexible Standards
Banks and mortgage companies set their own lending standards and some are more flexible than others. For some banks, a judgment on credit reports is a deal breaker until you resolve the issue on your own. For example, loans backed by the Federal Housing Administration are not available with unpaid judgments on your credit report. However, lenders offering non-FHA financing may allow you to use money from the refinancing to pay the debt.
Cash-Out
The judgment could be paid though a "cash-out" refinancing. Such financing plans allow you to modify the terms of your mortgage loan and receive some money at closing by tapping into your home's equity. Cash-out refinancing is popular with some lenders when the economy is strong and homes are rapidly appreciating in value. However, cash-out refinancing is tougher to come by when the real estate market is in a slump or during periods of high unemployment and slow job growth.
Interest Rates
A lender willing to approve you for a refinancing with an outstanding judgment on your credit report will likely charge a higher interest rate. This could result in thousands of dollars in additional finance charges over the life of the loan. Also, the money judgment adds to your debt if a cash-out plan is approved and used to satisfy the judgment. The Federal Trade Commission strongly urges people not to take out second mortgages or borrow against their homes for frivolous expenses---including debt consolidation. The FTC would rather people find other ways to pay off debt than borrowing against their homes.
Alternatives
Judgments are reported on credit reports for seven years and by law must be dropped after that. It may be better to delay the refinancing if your judgment is five or six years old. In a year or two, it will drop from your credit report and won't be an issue. Simply paying off the judgment is another option. It may be possible to settle with the creditor or debt collector for less than the full balance.
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