Can a Buyer Involved in a Lawsuit Get a Mortgage?

Most lenders do not approve borrowers involved in lawsuits. Question D in Section VIII, the Declarations section of the Uniform Residential Loan Application, specifically asks whether the borrower is party to a lawsuit. The borrower must answer "Yes" to this question regardless of whether he is the plaintiff or the defendant in the lawsuit. Lenders consider it fraud if mortgage borrowers lie on their applications about involvement in any current lawsuits. Some lenders also refer mortgage fraud cases to the FBI for investigation.

Mortgage Lender Concerns

Mortgage lenders worry about the effect a lawsuit may have on a borrower's finances. Lenders do realize some attorneys charge only a contingency fee in some types of cases, but this is the exception, not the rule. Often the losing party in a lawsuit pays all of the costs out of her own pocket. Some hopeful mortgage borrowers simply may not have enough cash reserves and might have to borrow more money to pay for lawsuits in which they're involved, thus jeopardizing mortgage payments.

Plaintiff Lawsuits and Mortgages

A hopeful mortgage borrower filing a lawsuit pays filing and possibly attorney expenses and also risks the other party counter-suing. Mortgage lenders may deny a loan when an mortgage applicant files a lawsuit because of the expected costs involved and uncertainty of the borrower's financial stability. If a hopeful mortgage borrower can prove her attorney works on contingency or that she isn't allowed an attorney, as in a small claims court action, the lender may choose to approve the loan despite the lawsuit.

Defendant Lawsuits and Mortgages

Lenders rarely approve mortgage loans for borrowers that are defendants in lawsuits. Lawsuit defendants also risk significantly more if verdicts go against them. Judgments resulting from lawsuits can result in a lien being placed against a mortgage borrower's property, for one. Judgment liens on properties give their holders the ability to foreclose those properties to satisfy their liens. Judgment liens can also be used to garnish mortgage borrowers' income and other assets, jeopardizing payment of their mortgages.

Lender Approval or Denial Privileges

Some mortgage lenders refuse to lend to anyone in a lawsuit while others seek details and explanations before approving or denying loans. Even if a borrower qualifies for a mortgage in all other ways a lawsuit may temporarily bar her from gaining loan approval. Mortgage applicants should also disclose any current lawsuits during the first interview to avoid having a lender decline the loan right before closing. A lawsuit is a public record and many mortgage lenders check such records immediately prior to their borrowers' loan closings.

references & resources