Credit Dispute During Mortgage Process

This BLOG On Credit Dispute During Mortgage Process Was Updated On June 17, 2017

We have covered many blogs on credit repair, credit dispute, and the importance of having descent credit scores to qualify for home loans. Borrowers with bad credit can qualify for FHA Loans without going through credit repair.  The two most important factors lenders look at when qualifying borrowers for home loans are the following:

  • Credit
  • Qualified Income

How Credit Is Viewed By Lenders

Mortgage Lenders view credit in two different ways when it comes to qualifying borrowers:

  1. Requirement of minimum credit scores: All loan programs have minimum credit score requirements and most lenders will have their own lender overlays on credit scores
  2. Review overall credit history which includes prior bad credit, collections, charge offs, judgments, tax liens, bankruptcies, foreclosures, deed in lieu of foreclosures, short sales 

Just because mortgage applicants meet the minimum credit score requirements for mortgage does not mean they automatically qualify.

  • Lenders and the Automated Underwriting System will carefully analyze borrower’s on time payment history, especially in the previous 12 months.
  • Special attention will be placed on timely payments after bankruptcy and after a housing event such as on time payment history after foreclosure, deed in lieu of foreclosure, short sale.

Mortgage Loan Programs For Borrowers With Bad Credit

Government loans are home loans for owner occupant one to four unit residential homes that is insured and guaranteed by the federal government.

  • Government Agencies insuring and guaranteeing these loans do not lend nor service loans.
  • Their role is to mainly insure and guarantee the bank or private lender that originates, funds, and services the home loans.

Here are the three government loan programs:

The best and most popular loan program for home buyers with bad credit are FHA Loans.

FHA Loans For Home Buyers With Bad Credit

FHA Loans are the most popular mortgage loan program in the United States.

  • FHA Loans are not just for borrowers with bad credit
  • FHA Loans are also very popular with first time home buyers and borrowers with higher debt to income ratios and needing non-occupant co-borrowers.

Here are some pin points on FHA Loans:

  • Minimum Credit Score Requirement 580 middle credit score to qualify for 3.5% down payment FHA Loan
  • Borrowers with credit scores between 500 FICO and 579 FICO can qualify for FHA Loans with 10% down payment with an Automated Underwriting System (AUS) approval
  • Borrowers can qualify for FHA Loans without having to pay outstanding collections and/or charge off accounts
  • Debt To Income Ratio Requirements on FHA Loans can be as high as 56.9% DTI for borrowers with at least a 620 credit score
  • Borrowers under 620 credit scores need a 43% debt to income ratio normally to get an approve/eligible per AUS
  • 2 year waiting period to qualify for FHA Loan after Chapter 7 Bankruptcy discharged date
  • 3 year waiting period to qualify for FHA Loans after recorded date of foreclosure and/or deed in lieu of foreclosure
  • 3 year waiting period to qualify for FHA Loans after a short sale
  • Lenders frown late payments after bankruptcy and/or foreclosure
  • The Gustan Cho Team has no lender overlays and can help borrowers with late payments after bankruptcy and/or foreclosure with an approve/eligible per DU/LP FINDINGS

Disputing Derogatory Credit

Again, credit dispute during mortgage process will automatically suspend the process until credit disputes are retracted.

  • Everyone can repair their credit themselves by writing credit dispute letters. 
  • Whatever a professional credit repair company can do, you can do it yourself. 
  • The first thing you need to do is get a copy of your credit report from each of the three credit reporting agencies. 
  • You then need to write a dispute letter contesting the accuracy of each of the negative credit items they are reporting. 
  • You can just write all of a dispute in one letter. 
  • Do not send a copy of your credit report to them. 

Attached is a sample letter format that many consumers use. However, Credit Dispute During Mortgage Process is not allowed by lenders so before disputing any derogatory credit, please consult with a loan officer.

SAMPLE DISPUTE LETTER TO SEND TO EACH OF THE THREE CREDIT BUREAUS

January 10, 2013

JOHN PUBLIC    SS# 123-45-6789  DOB: February 1, 1990

123 MAIN STREET

CHICAGO, ILLINOIS 60625

TRANSUNION

P.O. BOX 1000

CHESTER, PA19022

To Whom it May Concern:

I have recently acquired my credit report to check the information that has been reported on it. After carefully reviewing my credit report, I have found some inaccurate and/or unverifiable information. I have listed the accounts that I wish to have dispute and clearly marked upon it what I wish to challenge.

According to the FCRA (Fair Credit Reporting Act) I have the right to dispute information I believe to be inaccurate or unverifiable. I am specifically challenging section 609 (Consumer Disclosure Section) and demand that these items be corrected, removed or deleted and an updated copy of my credit report forwarded to me in a reasonable amount of time, namely 30 days. Failure to do so will cause further harm to my credit profile and I will be forced to file for damages under section 617 of the FCRA!

Account Name                     Account Number                        Dispute Reason

NBA COLLECTION             56343663                                       Paid In Full

ACC COLLECTOR                11CV000119                                  Not Mine

COOK COLLECTOR            11SC002443                                 Paid In Full

MEAN COLLECTIONS       11SC002990                                 Duplicate Account

ABC MERIT BANK              17580013455                                Not Mine

MIDLAND FUND                  85438552477217                        Not Mine

CAPITAL ONE                        V234321334447                         Not Mine

BARON COLLECTIONS     3454363035                                 Not Mine

CITIBANK                                542418069987U                        Not Mine

CHASE                                       76889119432133                        Not Mine

__________________________________________________________

*PLEASE ADD A TEMPORARY SECURITY ALERT TO MY CREDIT FILE

*PLEASE REMOVE ALL SOFT PULLED INQUIRIES OVER 30 DAYS OLD

__________________________________________________________

JOHN PUBLIC

  • This is a sample credit dispute letter that consumers may  send to the three credit reporting agencies.
  • Each of the three credit reporting agencies are independent of each other.
  • Consumers can do disputes online as well as via USPS.

Credit Reporting Agencies

Credit Reporting Agencies are private companies that collect and report date on consumers and businesses. Mortgage Lenders use the middle of the three credit score a mortgage applicant has as their qualifying credit score.

Here are the three links to the three credit bureaus:

  1. Transunion
  2. Experian
  3. Equifax

Once the credit disputes gets reviewed by credit reporting agencies, each credit bureau will be reporting back and updating consumers with the results of the dispute.

Credit Dispute During Mortgage Process Will Suspend Loan Process

Credit Dispute During Mortgage Process will automatically suspend the mortgage application process until the credit disputes are retracted. We will cover FHA Guidelines On Credit Disputes on the article since FHA Loans are the most popular loan program.

Here are the requirements on Credit Dispute During Mortgage Process:

  • Disputes on medical collection accounts are exempt no matter how much the outstanding medical collection account balance
  • Disputes on non-medical collection accounts with zero balances are exempt
  • Disputes on non-medical collections and charge off accounts are not allowed during mortgage process
  • Disputes on late payments are not allowed during mortgage process
  • Credit Disputes During Mortgage Process is allowed on non-medical collection accounts as long as the total outstanding collection account balances are under $1,000

Why Do Lenders Prohibit Credit Disputes During Mortgage Process

  • The reason credit disputes during mortgage process is prohibited is because a credit dispute will trigger the credit reporting agency to discount the negative factor from the consumer credit scoring formula.
  • For example, if a consumer were to dispute a recent late payment on a credit card collection account, the credit bureau will put this verbiage on the consumer credit report: ” Consumer disputes: Investigation In Process.”
  • This verbiage will re-calculate this consumer credit scoring model where the negative collection account is not factored in the scoring of the consumer credit score.
  • Since the negative item is not factored in, the consumer credit scores will increase because the credit scoring model is reading the report like the late payment does not exist.
  • Credit disputes during mortgage process is not allowed for this very reason.
  • Once the credit disputes are retracted, the negative factor is re-calculated back in and consumer credit scores will and can often times plummet.
  • The amount of drop or decrease in credit scores depends on the type of collections, amount of outstanding balance,  and the age of the collection account.

Retracting Credit Dispute During Mortgage Process

Pre-Approvals should not be issued by loan officers if they notice credit disputes on mortgage applicants credit reports until the disputes has been retracted.

  • Retracting Credit Disputes can and often times will drop credit scores.
  • One way of inflating credit scores is disputing medical collections if borrowers do have medical collection accounts because these are exempt.
  • However, credit disputes on medical collection accounts is just a temporary artificial increase in boosting credit scores so this strategy needs to be well timed.

Home Buyers who need to get qualified for mortgage with a loan officer that specializes in no overlays on government and/or conventional loans, please contact The Gustan Cho Team at 800-900-8569 or email us at gcho@gustancho.com. 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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