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I have gone through all the steps of a home refinance process, including an appraisal, and am waiting for a final decision. Just a few days ago, the loan officer processing my application asked me about employment gaps within the last two years and for a signed statement to explain my sources of income during those times. It's been several days and I haven't heard back from them since.

I have been employed full time for a year now and my income is plenty to support the monthly payment. During my unemployed time, I never missed a timely credit payment, mortgage, CCs, etc. My credit score is decent although not perfect because of some high CC balances, which I hope to pay if the refinance goes through. I have also received a preliminary conditional approval (before she asked me about unemployment) and a GFE. The home appraised really well and the LTV is only about 66%, so there is lots of room for the bank not to lose money.

I am curious whether it is legal for them to reject my loan application based on previous unemployment. Also, if they do reject based on a heuristic or a subjective "gut feeling" and not as a result of a firmly determined and regulated requirement, do I have any legal recourse?

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Legal, where? Add a country tag, please. –  Chris W. Rea Jul 28 at 20:34
    
i was hoping that the use of locale-specific acronyms, such as GFE, would indicate the country. but anyway, i am in the good ole U.S. of A. –  amphibient Jul 28 at 20:43
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We don't leave it up to acronyms in the question body. Tags let those interested in a given country's questions follow them, or conversely, ignore them. –  Chris W. Rea Jul 28 at 21:53
    
Not worth a full answer, but it's also worth noting the difference between "I had no income and let all my bills become past due and skipped some payments" and "I had enough savings to cover 6 months worth of bills" is what's really important in these cases. –  Thebluefish Jul 28 at 22:03
    
they have my credit history to see that your second quoted scenario was in fact the case –  amphibient Jul 28 at 22:07

1 Answer 1

To answer your final question: No, you have no legal recourse if the mortgage is denied, unless you can prove that they violated the Equal Credit Opportunity Act.

The pre-approval is contingent upon underwriting review. Part of the underwriting process is obtaining a satisfactory explanation from you regarding any gaps in your employment history, and they must feel confident that you are very likely to continue your employment while you're still paying your mortgage.

More than likely, the mortgage lender's automated system refused your application based on the employment history, and it has gone to manual underwriting. And if it has gone to manual underwriting, then they already have basis to deny your application, but are looking for a way to approve it (because they don't get paid if they don't close any deals).

Unfortunately, your current income doesn't hold too much bargaining power with their decision, because they have to assume you will make minimum payments through the life of the loan, and they're calculating the risk based on your ability to repay the loan throughout its life.

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why would they "assume you will make minimum payments through the life of the loan" ? why is it bad for them that i make minimum payments? they make more money that way over the life of the loan than having it prepaid. –  amphibient Jul 28 at 19:50
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The longer the term, the greater the uncertainty. There's absolutely nothing anybody can say to convince them that you will still be employed 10, 20, or 30 years from now. Auto loans are the same way. You'll notice that as the terms get longer, the interest rates go up. Which means not only are you giving them more time to earn interest, but they're earning it faster. It's to offset the risk of lending for that term. –  Noah Jul 28 at 19:57

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