Taking on a mortgage represents a serious commitment to many years of recurring payments. Due to the heavy financial implications of these loans, lenders carefully evaluate the risk-profile of an applicant before approving their mortgage request. If an applicant is currently involved in a lawsuit, this could prevent the lender from approving their borrowing request. As a general rule, a lawsuit can prevent mortgage applications from being approved.
TL;DR (Too Long; Didn't Read)
Although it is possible to secure a mortgage while being involved in a civil lawsuit, the chances are slim. Many lenders view the financial obligations associated with a lawsuit as a credible risk.
The Basics of Mortgages and Risk
Because of the large sums of money involved in mortgages, it is imperative that lenders carefully evaluate whether or not the applicant in question poses a serious risk of default. A mortgage default is truly in no one's best interest. Not only does it decimate the credit score and financial reputation of the homeowner, but it also represents a serious financial loss for the mortgage lender. With that in mind, mortgage companies will often do everything in their power to ensure that they do not commit funding to an individual who will eventually default on their financial obligations.
Lenders use a variety of parameters to assess the risk level of a particular applicant. For example, credit scores and employment history have long been considered core elements of an applicant's risk profile. Similarly, an applicant's current debt obligations will be assessed to determine whether or not they represent a large portion of the applicant's regular income.
Conventional Mortgage Funding Denial
Certain marginal financial characteristics may only result in increased interest rates. However, some factors, such as a credit score in the 500s, could represent a "red flag," which automatically voids eligibility for conventional mortgage financing. For many lenders, pending civil litigation is one of the red flags.
Lawsuits and Mortgages
The reason that so many lenders do not approve mortgage applications from individuals involved in civil court is relatively straightforward. No matter whether the applicant is the plaintiff or the defendant, lawsuits are an expensive proposition. Attorney fees can add up quickly, and the threat of being forced to pay a large sum in damages and/or court fees can lead mortgage lenders to immediately increase the risk level of an applicant.
This is not to say that all mortgage lenders will immediately reject applicants involved in legal proceedings, however. If, for example, an applicant has an otherwise spotless financial history, the lender may choose to ask for more details surrounding the case. If the explanation is satisfactory, the applicant may still be granted funding. Sometimes, compromises may be reached where applicants are still given access to mortgage funding, albeit it at a higher interest rate than they would have received otherwise.
Mortgage Application Questionnaire
It would be a mistake to think that an applicant could hide current lawsuit cases from a mortgage lender. Given the fact that these cases are actually part of the public record, the lender can and will check to ensure that applicants are not caught up in legal entanglements before passing verdict on their mortgage application. Individuals should openly disclose this information if prompted on a mortgage application questionnaire.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community.