Lawsuit During Mortgage Process Lending Guidelines For Borrowers

This article covers the lawsuit question on a mortgage application and what to do if you’re in a lawsuit during the mortgage process.

One of the questions borrowers face when applying for a mortgage is whether they are a party to a lawsuit. Being involved in a lawsuit, either as the plaintiff or defendant, triggers additional questions from the lender. It does not usually prevent you from getting the loan. 

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Can You Get Mortgage Approval if You Are the Plaintiff?

What Happens If You Are Suing Someone?

Borrowers who are the plaintiffs in a lawsuit during mortgage process, do not be concerned. 

If you are suing someone else,  the defendant could counter-sue, or you could face hefty legal fees if you lose the case. 

The lender will want to see your court filings and retainer. If your lawyer is working on contingency, meaning you don’t pay unless you win, there shouldn’t be any problems with your mortgage. 

If borrowers are the plaintiff and are suing someone, they do not have to mark the YES box when it asks whether they are a party to a lawsuit

Lenders are concerned when the mortgage borrower is the defendant and the party of the lawsuit.

Can You Get a Mortgage if Someone Is Suing You?

What Happens If Someone Is Suing You During Mortgage Process?

If mortgage applicants are defendants in a lawsuit, they need to mark the YES box on the mortgage loan application where it asks whether they are a party to a lawsuit.

Just because someone is a defendant in a lawsuit during mortgage process does not mean  he or she cannot qualify for a mortgage. You can find yourself in a lawsuit, for instance, if you cause an auto accident. 

Again, you’ll provide the court documents to your lender. Underwriters want to see if borrowers were insured at the time of the accident. They want to know that the insurer’s attorneys are representing the borrower. Insured folks who have been involved in an automobile accident and are defendants should not have any worries in their lawsuit during mortgage process.

What if it’s not an auto accident and you’re defending yourself? In that case, provide a letter from your lawyer explaining the case, the likely outcome

Can the Defendant in a Lawsuit Qualify for a Mortgage?

Can Defendant In Lawsuit Qualify For Mortgage

If someone is a defendant is being sued with no insurance, the lawsuit during mortgage process can become an issue. Lenders will ask for a letter of explanation from your attorney. Underwriters consider the potential liability of the lawsuit along with your other information when making a decision. 

If the lawsuit is in small claims court, there should be no issues. However, if the plaintiff is asking for a substantial sum because of negligent acts, mortgage underwriters will look hard at the facts of your case. They don’t want to grant a mortgage to a borrower who loses in court and ends up with a massive judgment. 

Courts can enforce judgments with wage garnishments and asset seizure, or placing liens on the borrower’s home. These can take precedence over the lender’s lien, leaving the lender nothing if it has to foreclose on you. Wage garnishment can also make it difficult for borrowers to pay their mortgages. 

What Lenders Say About Lawsuits

Surprisingly, Fannie Mae and Freddie Mac do not prohibit loans to borrowers involved in lawsuits. 

Here’s what Fannie Mae says: “Fannie Mae does not have a policy regarding a borrower who is a party to a lawsuit.  However, a lender should factor this in the underwriting of the loan (and ability to repay) as part of their overall loan decision, especially if the lawsuit has the potential for personal liability.  

Having the box checked on the loan application would not make the loan ineligible on its own.”

If you have enough money or income to satisfy a judgment without impacting your ability to repay your mortgage, it’s up to you (and a good loan officer) to make your case. And that’s probably good practice for defending yourself in that lawsuit. 

Mortgage Borrowers who need to get qualified for a mortgage with a mortgage company licensed in multiple states with no overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] GCA Mortgage Group is a national mortgage company with no overlays on FHA, VA, USDA, and Conventional Loans.

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