Mortgage lenders look at a variety of factors when deciding whether or not to approve a mortgage application. Lenders want to know whether applicants possess the financial ability to abide by the mortgage terms and make all required payments. Mortgage lenders examine applicants' income, assets, credit history and outstanding debts. Pending litigation involving an applicant may also factor into the lender's ultimate decision to approve or decline a loan request.
Legal Rights and Requirements
Mortgage lenders are legally allowed to ask loan applicants if they are currently involved in any lawsuit. Lenders can also inquire into previous bankruptcies and foreclosures. These questions are frequently asked and even appear on Fannie Mae's Uniform Residential Loan Application.
Failure to disclose a pending lawsuit can constitute a material breach of contract and can result in criminal liability. When asked, applicants must disclose the existence of pending lawsuits. However, pending litigation does not automatically negate their chances of being approved.
Revealing Information About Lawsuits
An mortgage loan applicant should be thoughtful about how much information to provide to the lender about a pending lawsuit. Information contained in a public record is typically safe to provide to the bank. This information would include the case name and case number, the name of the court hearing the case, whether the applicant is a plaintiff or defendant, the amount sought, the existence of any counterclaims, and a summary of the complaint. An applicant would generally consult with an attorney before deciding what information to provide.
Lawsuits That Might Hurt
Banks view lawsuits as potential obstacles to an applicant's willingness or ability to comply with the mortgage terms. When a lawsuit threatens to economically damage a loan applicant, the risk to the mortgage lender grows.
Examples of lawsuits that may hurt an applicant's chances of obtaining a mortgage include civil claims for damages in an amount that exceeds the applicant's liability insurance limits (perhaps a significant injury claim) and claims not covered by insurance, such as one filed by the victim of battery or defamation. A pending divorce could also greatly affect an applicant's assets and income.
Types of Lawsuits that May Not Hurt
Applicants pursuing -- as opposed to defending -- claims in pending lawsuits should stress to the mortgage lender that litigation will not damage and may even enhance their financial situations. For example, a mortgage loan applicant suing a previous employer for harassment or retaliation may or may not receive a settlement offer, but the litigation itself is unlikely to cost the applicant money since most attorneys taking such claims pay for costs and expenses.
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