Credit Dispute Mortgage Guidelines And Exempt Requirements


This BLOG On Credit Dispute Mortgage Guidelines And Exempt Requirements Was UPDATED And PUBLISHED On April 12th, 2020

What are your mortgage guidelines and waiver requirements?

Credit report disputes can be more harmful than helpful when buying a house:

One of the most common mistakes licensed loan officers make is issuing credit loan approvals with outstanding credit disputes.

  • Basic scenario
  • Home buyer consults with loan officer
  • Loan officer takes 1003 mortgage loan application
  • Loan officer runs tri-merger credit report
  • Credit score comes to 587
  • Borrower applies for FHA Loan and qualifies since HUD Guidelines requires 580 credit scores for 3.5% down payment
  • Loan officer request mortgage documents required to process mortgage loan
  • Everything looks good. Income, assets, and debt to income ratio meets all HUD 4000.1 FHA Handbook FHA Guidelines
  • Loan Officer issues pre-approval
  • A borrower goes and enters into a real estate purchase contract
  • The mortgage gets processed and all of a sudden mortgage underwriter suspends file due to credit disputes
  • Borrower’s loan is now at risk

Under Credit Dispute Mortgage Guidelines, borrowers cannot have credit disputes during mortgage process. In this article, we will discuss and cover Credit Dispute Mortgage Guidelines And Exempt Requirements.

Reason Why Credit Dispute Mortgage Guidelines Does Not Allow For Disputed Tradelines During Mortgage Process

Most consumers and even loan officers do not realize why there are credit dispute mortgage guidelines and the mechanics of credit disputes.

  • The reason why credit disputes are not permitted during mortgage process is due to how it triggers the credit scoring formula at all three credit bureaus
  • Whenever consumers disputes derogatory credit tradelines, the credit bureaus will trigger that derogatory disputed tradeline like it does not exist
  • Therefore, the verbiage “consumer disputes above credit tradeline” will automatically trigger as if the derogatory item does not exist under the credit scoring formula
  • Therefore, consumer credit scores will increase
  • The credit scores loan officers pull is not an accurate credit score
  • Therefore, mortgage underwriters will suspend any files with credit disputes during mortgage process

Unfortunately, when consumers retract credit disputes, their new consumer credit scores will be lower since the credit bureaus will factor the negative tradeline back into the credit scoring formula.

Exempt Credit Dispute Mortgage Guidelines Allowed

What are the mortgage guidelines allowed

Not all credit disputes need to be retracted to get the file out of suspense status during mortgage process.

  • Medical disputes are exempt. Non-medical credit disputes with zero balances are exempt from retraction
  • If the total aggregate non-medical outstanding collection accounts are under $1,000 in outstanding balance, then it is exempt from retractions
  • Charged off accounts cannot be disputed, whether medical and/or non-medical
  • Any other derogatory credit item that has not been seasoned longer than 24 months cannot be disputed
  • Late payments on installment and/or revolving accounts can be exempt from credit disputes if and only if the outstanding balance is less than $1,000
  • For example, if a borrower has a credit card account with a credit limit of $2,000 and an outstanding balance of under $1,000, the borrower can dispute the late payment and not retract it
  • The reason being is because it meets the $1,000 threshold

If consumers have a credit dispute on a $2,000 credit limit revolving account with a $1,500 late payment, pay down the balance to under $1,000 and the dispute does not have to be removed.

Retracting Credit Disputes To Get Loan Out Of Suspense

A couple of months ago I got a call from a potential client wanting some advice on how to increase their credit score to qualify for a house.

  • I asked the client if it was okay for me to pull their credit report and take a look at it the client gave me consent
  • I pulled the report and the score looked fine
  • The borrower had a few late payments
  • But nothing too major that would slow down the home buying process
  • I asked someone from management to take a look at the report
  • This was because I’m a newer loan officer
  • I wanted to make sure I did not miss anything
  • Management emailed me back saying the client disputed quite a few late payments
  • The credit score on the report is not accurate when there are credit dispute pending

I then called the client back and explained to them that the dispute needs to be removed before we can move forward the client was not happy but they understood.

Dangers Of Credit Disputes During Mortgage Process

What are the dangers of credit disputes during the mortgage process

Potential borrowers may dispute items on their credit score thinking this will help their credit score.

  • Although this is true the credit score can increase quite a bit but it’s not accurate and does not give underwriting an accurate credit history
  • The credit reporting agency has to label the item being disputed in bold as “consumer disputes” or something similar
  • In this case, the client will have  to wait until the dispute is removed and postpone their plans of homeownership
  • To prevent this from occurring keep track of what’s being reported on your credit report and if you have any inaccurate items fix it before you go through the home buying process
  • Online tools like Credit Karma are good for alerting you when something is being reported on your credit and it’s free
  • Also, gives non-customers a free FICO score

Borderline Credit Borrowers

What happens if the borrower has borderline credit scores of 580 and outstanding credit disputes.

  • Common sense says that removing those credit disputes will no longer make borrower eligible for 3.5% down payment FHA Home Loans
  • Chances are credit scores will drop by retracting dispute, especially if the disputed tradeline is a recent derogatory credit tradeline
  • There are certain trades of the trade that we can help you with
  • If consumer is disputing late payment, then pay down the balance below the $1,000 outstanding balance
  • If borrower has medical disputes that is not being disputed, try disputing medical collections to increase credit scores to offset the drop of the non-medical collection account disputed account retraction

Call us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for a faster response for more information. Or email us at

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