We research, you save.

What Mortgage Lenders Can and Can't Ask Under Federal Law

HSH.com

When going through the application process for a home loan, your mortgage lender needs to learn about you so they can properly assess risk. But some of the questions they ask may take you aback, while others are downright illegal. Understanding the motives behind three legal lines of questioning, and spotting two types of questions lenders can't legally ask -- according to the Fair Housing Act and other federal law -- will help to better prepare you for the mortgage loan process.

Three Legal Questions

1. Are You Currently "Involved" in Any Lawsuits?

This question is part of the "declarations" section of every application for every new home loan or mortgage refinance. You have to answer and sign off on this section, swearing that your responses are true. Lenders get nosy about lawsuits because a big judgment can be very damaging. "Involved" means that you are a plaintiff or defendant. If you are, write an explanation for the underwriter, and address the following:

  • the amount involved,
  • your status (plaintiff or defendant),
  • the existence of counter-claims,
  • applicable insurance coverage, and
  • the merits of your case (get a statement from your lawyer).

2. Your Divorce: We Want Details

Divorce is a personal matter -- but it's also an event that has financial consequences. Your mortgage lender may want to know about your divorce because it is a prime cause of bankruptcy. While, you can keep the dirty laundry to yourself, underwriters just want to understand the financial fallout. Who got the house and the payment? Who cuts checks for child support or alimony? Is everyone making their payments on time? Are there any joint accounts still open which could expose you to "contingent liability" if your ex fails to make payments? This will increases your debt-to-income ratio, and really affect your ability to get a new mortgage.

Why is it so difficult to get away from your former spouse's debt? It's because your creditors agreed to lend to you both, and only your creditors can release you from an obligation. A judge's order can't make only one of you responsible for debt incurred by both of you. So if your ex fails to obey the judge and defaults on an obligation, the creditor will almost certainly come after both of you for repayment.

This is also why lenders often refuse to approve new home loans for recently divorced spouses. Each of you must establish a good credit history independently. Per Fannie Mae, "The lender is required to evaluate the payment history for the assigned debt after the effective date of the assignment. The lender cannot disregard the borrower's payment history for the debt before its assignment." What if you have separated but not divorced? Most lenders require that you have a legal separation agreement and solid credit before you can get a mortgage loan on your own.

3. What Is Your Ethnic Background?

This question is part of the "information for government monitoring purposes" section in a standard mortgage application. It seems odd -- why would they ask this if discrimination based on race is illegal? Avoiding discrimination is exactly why they ask. If they don't ask, they're not complying with the Home Mortgage Disclosure Act (HMDA). The Department of Housing and Urban Development (HUD) has lenders collect this data so it can look for patterns of discrimination. For example, lenders charging larger loan fees to minorities or declining minority mortgage applications more often than they do for other groups. You aren't required to answer (there is a box to check if you'd prefer not to), but then the loan officer has to make a guess about your origin and make a note for HUD.

Two Illegal Questions

1. Are You Planning a Family?

In the old unregulated days, loan officers routinely asked female applicants this pushy question. A widely held assumption in lending was that women would quit their jobs as soon as they got married or pregnant. Lenders who ask that today are committing a big blunder under the Equal Credit Opportunity Act. They can ask about your marital status and the number of dependants you have to determine if you qualify as a first-time homebuyer. If you were once married and indicate that you formally owned a principal residence jointly with a spouse (and you have dependents), you qualify as a first-time homebuyer. Finally, underwriters can't treat income differently because of your gender or marital status. For example, they can no longer count a man's earnings at 100%, but a woman's at 75%. Also, they can't underwrite on the assumption that women will quit their jobs to raise children.

2. Are You Ill or Disabled?

Mortgage lenders aren't allowed to discriminate against applicants who are elderly, ill, or disabled, even if they are 90 years old and taking out a 30-year loan. Your age is only relevant in determining if you're old enough to sign a contract or if you are eligible for a reverse mortgage. The Fair Housing Act and the Americans with Disabilities Act (ADA) prohibit discrimination based on health problems. Lenders can't treat you differently because of your gender, age, marital status, race, color, national origin, public assistance status, or if you filed any complaint under consumer protection laws. They cannot discourage qualified people from applying for a mortgage.

It's essential to know your rights when you shop for a mortgage. If you're asked an inappropriate question, report it, and then find another mortgage lender.

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

More help from HSH.com