Stuck in a Lawsuit During the Mortgage Process? Do This NOW!

Lawsuit During the Mortgage Process: What You Need to Know to Get Approved

If you’re in the middle of a lawsuit during the mortgage process, you may wonder whether you can still be approved for a home loan. Many borrowers worry that being a plaintiff or a defendant in a lawsuit could stop them from buying a house. The good news is that it doesn’t automatically disqualify you but raises concerns for lenders.

In this guide, we’ll break down how lawsuits affect mortgage applications, what lenders look for, and how you can still get approved—even with a pending lawsuit.

Does a Lawsuit Affect a Mortgage Application?

Yes, a lawsuit can affect your mortgage approval, but it depends on whether you are the plaintiff (suing someone) or the defendant (being sued). Remember that if you’re involved in a lawsuit during the mortgage process, it could raise red flags for lenders. Here’s what you need to know:

1. Plaintiffs (those suing others) generally do not face major issues. However, lenders may ask for court documents if the case involves large amounts of money.
2. Defendants (those being sued) may find it harder to get approved for certain things. This is especially true if the lawsuit might result in financial problems, like having part of their wages taken or their assets seized.
3. Judgments and liens from lawsuits can appear on your credit report and hurt your chances of approval.

Pro Tip: If you’re involved in a lawsuit during the mortgage process, be upfront with your lender. Lenders prefer honesty and proper documentation rather than surprises during underwriting. By being upfront about any legal issues, like a lawsuit, you can help avoid problems down the road and build trust with your lender.

Lawsuit During the Mortgage Process: Can You Get a Mortgage If You Are a Plaintiff in a Lawsuit?

Being a plaintiff in a lawsuit, which means you’re the one suing someone, usually doesn’t mean you can’t get approved for a mortgage. However, there are some important things to keep in mind if you find yourself in this situation:

• A lawsuit during the mortgage process could delay things.
• The defendant could counter-sue, increasing your financial risk.
• If you expect a large settlement, some lenders may ask about its potential impact.
• If your attorney works on contingency (no payment unless you win), your finances likely won’t be affected.

Mortgage Application Tip

When filling out the 1003 mortgage application, being honest about your situation is important. If you’re involved in a lawsuit during the mortgage process, you need to let your lender know. Some borrowers think they can check “No” because they bring the lawsuit or the plaintiff, but that’s not the right approach. It’s important to be upfront and disclose any lawsuits. Always take the time to confirm with your lender about what you need to include in your application. This way, you will have a smoother process and avoid any misunderstandings down the road.

Can You Get a Mortgage if You Are a Defendant in a Lawsuit?

If you are a defendant in a lawsuit, getting a mortgage is more complicated but not impossible. Underwriters will look at:

• Type of lawsuit – Is it a small claim or a major financial liability?
• Financial impact – Could the lawsuit result in wage garnishment or a lien?
• Insurance coverage – If insurance covers the lawsuit, it’s less of a concern.

Underwriters want to make sure you can handle your mortgage payments even if you’re dealing with a lawsuit during the mortgage process.

Case Scenario

Imagine you’re in the process of getting a mortgage for your new home. You’re excited and ready to move in, but then you receive a notice that someone is suing you over a car accident you had last year. Thankfully, your auto insurance company is handling the case, so you feel relieved.

However, when you apply for the mortgage, the lender sees that lawsuit during the mortgage process. Since your insurance is taking care of it, the lender feels it’s not a big risk. They continue with your application, and you get approved for the home loan.

Now, consider a different situation. Let’s say you owe a large amount of money on an unpaid debt, and that creditor takes you to court. This time, the lender takes notice of the lawsuit during the mortgage process, and they might worry that you could struggle to pay your mortgage on top of that debt. As a result, this could hurt your chances of getting approved for the loan.

In short, how a lawsuit affects your mortgage approval can really depend on the kind of lawsuit and whether you have support to manage it.

Can You Get a Mortgage With a Lawsuit Pending?

Yes, lenders will definitely need some paperwork from you. Here’s what you should know: if you’re going through a lawsuit during the mortgage process, this can complicate things. You’ll need to gather specific documents that show your financial situation clearly, like:

• Provide court documents explaining the lawsuit.
• Show proof of insurance coverage, if applicable.
• Get a letter from your attorney estimating the lawsuit’s outcome.
• Prove that the lawsuit won’t affect your ability to repay the loan.

Pro Tip: If the lawsuit is close to resolution, consider waiting until it’s settled to apply for a mortgage. This can make the process easier.

Can You Borrow Against a Pending Lawsuit?

Some borrowers wonder if they can use money from a lawsuit settlement for their mortgage down payment. Here’s what you need to know:

Most lenders will not count the possible settlement as income if the lawsuit is still happening. This means you can’t use it to qualify for your mortgage. If you have already won the settlement, you must show proof that the money is in your bank account before you can use it for your down payment.

Some lenders might see structured settlements as a steady income source, but you must demonstrate that these payments are regular.

How Do Lenders View Lawsuits in Mortgage Underwriting?

Lenders do not automatically deny your application when you are involved in a lawsuit during the mortgage process. However, they do weigh several important factors before making their decision.

First, they check Fannie Mae and Freddie Mac’s guidelines. No strict rules prevent lenders from lending to borrowers in lawsuits, but lenders need to assess financial risks.

Another key factor is your Debt-to-Income (DTI) Ratio. If the lawsuit results in a judgment or garnishment, it could increase your DTI too much, making it more challenging to qualify for a loan.

Lastly, lenders will look at your overall financial stability. If you have a strong income and sufficient assets in the bank, this can alleviate some of the lender’s concerns about your lawsuit.

In summary, while a lawsuit may raise some questions for lenders during the mortgage process, it does not automatically lead to a denial. It all depends on evaluating your financial situation as a whole.

Can You Sue a Mortgage Company for Delaying Closing?

If your lender is delaying the closing of your mortgage because of a lawsuit, here’s what to do:

1. Ask why the closing is delayed.
2. Request a written timeline for when you can expect to close.
3. Talk to a real estate lawyer if you might lose money.
4. Review your purchase contract for any rules about delays.

For example, if the delay causes you extra costs, like storage fees or temporary housing, you might be compensated.

How to Get a Mortgage With a Lawsuit Pending

If you are in a lawsuit and still want a mortgage, Gustan Cho Associates can help. We specialize in loans for borrowers facing challenges like lawsuits, credit issues, or non-traditional income.

Steps to improve chances of approval:

1. Work with a lender experienced in handling legal complexities.
2. Have your attorney draft a letter explaining the lawsuit’s impact.
3. Show that you have enough income/assets to cover potential liabilities.
4. Consider non-QM loans, which have more flexible requirements.

Need help? Contact Gustan Cho Associates at (262) 716-8151 or alex@gustancho.com.

Final Thoughts

Having a lawsuit during the mortgage process doesn’t mean you can’t get approved. Lenders want to make sure your legal situation won’t affect your ability to repay the loan. You can go through the process smoothly by providing the right documentation and working with an experienced lender like Gustan Cho Associates.

📞 Ready to get started? Call us at 262-716-8151 or email alex@gustancho.com to discuss your mortgage options today!

Frequently Asked Questions About Lawsuit During the Mortgage Process:

Q: Can I Still Get a Mortgage if I’m Involved in a Lawsuit During the Mortgage Process?

A: Yes, but it depends on whether you are the plaintiff (suing someone) or the defendant (being sued). Plaintiffs usually don’t face major issues, but defendants might have to provide more documents to prove financial stability.

Q: Do I have to Tell my Lender About a Lawsuit During the Mortgage Process?

A: When you fill out the 1003 mortgage application, check YES if you are in a lawsuit. If you don’t disclose this, it could be seen as mortgage fraud, leading to serious problems in the future.

Q: Will a Pending Lawsuit Stop Me from Getting a Mortgage?

A: Not necessarily. Lenders will want to know the details of the lawsuit, including court documents, financial risks, and whether it could affect your ability to pay your mortgage.

Q: Can a Lawsuit During the Mortgage Process Delay My Home Loan Closing?

A: Yes, it can. If the lender is concerned about your lawsuit, they may require extra paperwork, which can slow down underwriting. Working with an experienced lender like Gustan Cho Associates can help avoid delays.

Q: Can I Use a Lawsuit Settlement as a Down Payment for My Mortgage?

A: Only if the lawsuit is already settled and the funds are in your bank account. Lenders will not count the potential settlement as income if your lawsuit is still pending.

Q: What if I’m Being Sued for Something Small, Like a Car Accident?

A: If you have insurance covering the lawsuit, it likely won’t affect your mortgage approval. However, if the lawsuit could result in a large financial judgment, lenders may consider it a risk.

Q: Can a Lawsuit Affect My Credit Score and Mortgage Approval?

A: Yes. If the lawsuit results in a judgment, wage garnishment, or lien, it can hurt your credit score and debt-to-income (DTI) ratio, making mortgage approval harder.

Q: What Documents do I Need if I’m in a Lawsuit During the Mortgage Process?

A: Your lender may ask for:

1. Court documents explaining the lawsuit
2. Proof of insurance covering legal fees
3. A letter from your attorney about the expected outcome
4. Evidence that the lawsuit won’t affect your mortgage payments

Q: Can I Sue My Mortgage Lender if They Delay My Closing Because of a Lawsuit?

A: If the lender’s delay causes financial loss, you may be able to take legal action. However, most delays can be solved by working with an experienced mortgage professional.

Q: What Actions Can I Take to Up My Chances of Getting Approved with a Lawsuit During the Mortgage Process?

A: To increase your chances of approval, follow these steps:

• Work with a lender familiar with complex situations (Gustan Cho Associates specializes in this!)
• Provide full documentation of the lawsuit
• Show strong income and assets to prove financial stability
• Consider non-QM loans, which have more flexible guidelines

This blog about the waiting period after foreclosure requirements for borrowers on title but not on mortgage was updated on February 6th, 2025.