How Credit Dispute During Mortgage Process Can Cause Mortgage Denial

How Credit Dispute During Mortgage Process Can Cause Mortgage Denial

This BLOG On How Credit Dispute During Mortgage Process Can Cause Mortgage Denial Was UPDATED On January 13th, 2018

Millions of Americans fell victim to the economic, real estate, and banking collapse of 2008.

  • The Great Recession of 2008 devastated more families than any other Recession in U.S. history
  • Bankruptcies hit historical highs
  • Countless of hard working Americans lost their businesses, jobs, pensions, and homes
  • The Great Recession of 2008 was the longest lasting Recession in U.S. history
  • Many experts consider it as our second Great Depression and not a Recession
  • The outcome of the real estate and credit meltdown left millions of Americans with bad credit
  • Credit Repair companies started popping out of nowhere and countless of folks who lost their homes and recovered signed up for credit repair programs so they can qualify for home loans
  • Mortgage Borrowers do not need credit repair to qualify for mortgages
  • Credit Dispute during mortgage application process do more harm than good
  • Credit Dispute on non-medical collections, late payments, charge offs, and other derogatory credit is not allowed

Qualifying For Home Loans With Bad Credit

There are government and conventional loans for home buyers.

  • The best loan program for home buyers with bad credit are FHA Loans
  • The United States Department of Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA)
  • HUD sets up FHA Guidelines
  • FHA is not a lender but a government agency that insures FHA Loans. Banks and private mortgage companies originate and fund FHA Loans
  • If FHA Approved Mortgage Lenders follow FHA Guidelines when originating FHA Loans, HUD will insure lenders on borrowers who default on their FHA Loans
  • The role of FHA is to promote home ownership to hard working Americans with less than perfect credit with 3.5% down payment
  • Credit Repair is not necessary to qualify for FHA Loans
  • Credit Repair can do more damage than good during mortgage application process
  • Credit Dispute During Mortgage Application Process can disqualify many borrowers from qualifying for mortgage loans

HUD understands that people can go through periods of bad credit:

  • Many lost their businesses and jobs which led them to bankruptcy and/or foreclosure due to the Great Recession of 2008
  • The economic recovery took longer than most economic recovery in history
  • Once Americans got back to work, many saw that they had damaged credit
  • Many hired credit repair companies to repair their credit and start re-establishing their credit
  • Other folks repaired their credit by themselves hoping to delete prior derogatory information

Basic Credit Repair Strategies

Anyone can repair their credit and it is not rocket science to do credit repair.

  • The way people repair credit is to first obtain a copy of consumer credit report
  • The way consumers try to delete derogatory tradelines off their credit report is to dispute derogatory tradelines to the three credit reporting agencies: 

Consumers normally write them a letter disputing that the derogatory credit item is not theirs. Credit reporting agencies will contact the creditor consumers are disputing to verify the validity of the credit dispute

  • If the creditor does not respond back to the credit reporting agencies within 30 days, the credit disputed derogatory item needs to fall off credit report
  • Credit repair companies use this strategy in repairing credit
  • However, this credit dispute strategy can back fire on consumers big time if they are in the mortgage application process
  • There are many instances where retracting credit dispute on derogatory disputed item can backfire on borrower and cause a mortgage loan denial

Retracting a credit dispute often drops credit scores.

Credit Dispute NOT Allowed During Home Loan Application Process

It will not matter whether mortgage applicants credit scores are over 800 scores but credit disputes on non-medical collections and derogatory tradelines are NOT ALLOWED.

  • Any disputes with a balance on it will be an automatic disqualification
  • The credit dispute needs to be retracted before the mortgage loan approval process can continue
  • Mortgage loan originators should not issue a pre-approval until they have reviewed the mortgage loan borrower’s credit report and make sure that there are no credit disputes on their credit report
  • Credit disputes can be retracted, but a major problem is that once a credit dispute is retracted from the borrower’s credit report, the borrower’s credit scores will drop
  • For those who had borderline qualifying credit scores can get hurt big time if the credit dispute is retracted
  • Retracting a credit dispute can cause a borrower’s credit scores to drop by 80 points or more

Things To Consider Before Hiring Credit Repair Company

Consumers who are planning on hiring a credit repair company and intending on buying a home in the near future, make sure to tell credit repair company that they do not want to dispute derogatory credit items with credit balances on them.

  • Another thing consumers should realize is that older derogatory items stay on credit report for only 7 years and have no impact on credit scores
  • Many times consumers do not need the services of a credit repair company
  • The older the credit derogatory item is, the less of an impact it has on the consumer’s credit scores
  • Many times credit scores will not change by having a derogatory item deleted
  • It is next to impossible to get a recent credit late payment deleted via the credit dispute method
  • The older the derogatory item is, the easier it is to remove it from credit report
  • Home buyers can still qualify for a mortgage approval with prior bad credit and outstanding collections and charge offs without having to pay them off

Why Lenders Do Not Allow Credit Dispute During Loan Process

The reason credit dispute on derogatory information is not allowed during mortgage application process is due to the following reasons:

  • Once consumer disputes a negative item such as a recent late payment, the credit bureaus automatically states the verbiage: Consumer Disputes The Credit Tradelines
  • This verbiage automatically triggers the credit scoring system to take out the derogatory item from the credit scoring formula so consumer credit scores will automatically go up because the derogatory item is non-existent in the scoring model
  • When consumers retract the credit dispute, the credit bureaus scoring system will factor the derogatory item back on the scoring system so the consumer credit scores will drop

Once of the major reasons for a mortgage loan denial is because loan officers issue pre-approval letters without carefully reviewing borrowers credit report for any disputes. Borrowers go out and enter into a real estate purchase contract and when their mortgage application process starts and underwriter sees credit disputes, the loan is then suspended until the credit dispute is retracted. Once the disputes are retracted, the borrowers credit scores can plummet where they no longer qualify for mortgage loan.

Credit Disputes Exempt

There are certain credit dispute that are exempt.

  • Medical Collections are exempt from credit dispute
  • Non-medical collections with zero balances are exempt
  • Borrowers who have outstanding non-medical collections under $1,000 are exempt from retracting credit dispute

If borrowers have credit disputes and the loan officer realizes that they will not qualify for mortgage if disputes are retracted, the loan officer can request a manual underwrite without having the credit disputes retracted. Mortgage borrowers who need to qualify with a direct lender with no mortgage lender overlays on government and/or conventional loans can contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at We are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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