1. Yes, it is in the original story, but there are many other differences between the original story and this one. In the original story, Gawain is either Mordred's brother, half brother, or cousin. While in this game, he is adopted, rather than blood-related. (though this is just one example)
2. "For the most part, any homosexual behaviour was considered sinful by medieval society, and often laws against sodomy proscribed harsh penalties such as castration and execution.
On the other hand, research has revealed that at times, same-sex relationships were tolerated and that positive depictions about homosexuality can be found in medieval literature." - https://www.medievalists.net/2011/07/same-sex-relations-in-the-middle-ages/
3. See above. Also, some people need a break from racism being attached to black characters, it is not a requirement. "Nonetheless, in the period from 500 to 1500, European writers did remark upon skin color and cultural differences, and they understood some traits to be inherited. " - https://www.aaihs.org/race-and-identity-in-medieval-europe/ (while it was true that they were still INCREDIBLY racist, remember that this is a fictional city. I, for one, am glad to have a game were I can have an openly gay, bi, or trans character without the transphobia and homophobia, I've seen enough to make me uncomfortable.
4. There have been multiple stories with POC and LGBT people based off actual fairy tales and stories, and what's the harm in that? It's re-imagining an existing piece of literature, and can be quite fun, too! By reducing the amount of characters someone can make in that re-imagining, it limits you to the same types of characters.
(Bonus!) By your logic, Mordred cannot be a woman, since women couldn't be CALLED a "knight"
"During the Middle Ages, women could not be granted the title of Knight; it was reserved for men only. However, there were many chivalric orders of knighthood that admitted women and female warriors who performed the role." - https://www.thoughtco.com/female-knights-4684775#:~:text=During%20the%20Middle%20Ages%2C%20women,warriors%20who%20performed%20the%20role.
Anyways, thanks for the challenge! It's been fun researching this type of stuff, which I've been planning to do for a while!