Credit Disputes During Mortgage Process Will Halt Underwriting Process

This BLOG On Credit Disputes During Mortgage Process Will Halt Underwriting Process Was UPDATED On January 15th, 2019

Credit disputes during mortgage process may not seem like a big deal

• However, it is one of the most negative factors in the mortgage application and mortgage approval process
• An experienced mortgage loan officer should thoroughly review the mortgage loan applicant’s credit report
• They should carefully go over the mortgage loan applicant’s credit items and see if there are any credit disputes against derogatory credit items
• Many mortgage loan originators just look at the mortgage loan borrower’s 1003 mortgage loan application and just look at the borrower’s credit scores and browse through their credit report to look at prior bankruptcies, foreclosures, and recent payment history
• Overlooking credit disputes is what can make a file blow up on the 11th hour
• Pre-approval letters that are issued with credit disputes can be considered null and void
• Credit disputes are one of the main reasons why a pre-approval turns into a mortgage loan suspense account and/or mortgage loan denial

In this article, we will cover and discuss how credit disputes during the mortgage process can halt the process.

What Are Credit Disputes During Mortgage Process?

Credit disputes are often common when a consumer is trying to repair their credit. This is often done by disputing a negative item such as a collection account, charge off, late payments, judgments, or other derogatory items off their credit report by disputing the negative credit item to the three credit reporting agencies.

• The way credit disputes work is when you have a derogatory credit item
• Consumers write to the credit bureaus stating that the item does not belong to you or it is wrong
• The credit reporting agency then notifies the creditor about the credit dispute
• The creditor has thirty days to respond back to the credit reporting agencies with proof validating the credit dispute
• If the creditor validates the consumer’s dispute, the derogatory stays on the consumer’s credit report
• If the creditor does not respond back in 30 days to the credit bureaus, then by federal law, the credit bureaus need to delete the negative item off the consumer’s credit report
• In theory, this is how it works
• In real life, credit bureaus have a tendency of not removing derogatory item off the consumer’s report even after 30 days of the creditor not getting back to them and the consumer has the verbiage that the credit item is in dispute
• This can last many months and when a derogatory item is in credit dispute, it can halt the mortgage application and mortgage approval process

Exempts Items With Credit Disputes During Mortgage Process

There are certain types of credit disputes that are exempt and consumers can dispute them during the mortgage application and approval process.

• Mortgage lenders classify credit items into two types:
  • Medical
  • Non-Medical

Mortgage Applicants can have credit disputes with medical collection accounts or medical derogatory credit items even if there are unpaid balances.

• Medical collection accounts are totally exempt from credit disputes
• Medical collection accounts, even medical collection accounts with credit balances, are totally exempt when it comes to mortgage loan qualification requirements

HUD Guidelines On Charged Off Accounts

Charge offs are exempt on FHA Loans and do not count and can be ignored by lenders

• However, if borrowers have a charge off accounts with a credit dispute, the mortgage loan application and approval process will be halted until the credit dispute on that charge off account has been retracted and removed from credit report
• Borrowers with charge offs on credit report should leave it alone because it will not affect them in getting an FHA Loan
• However, borrowers with credit dispute on charge off accounts, the file will be suspended until the credit dispute has been retracted and removed

FHA Guidelines On Collection Accounts

FHA does not require the borrower to pay off a collection account with an outstanding balance.

• However, FHA does require that if the total amount of unpaid non-medical collection account’s balance is over $2,000 that 5% of the outstanding unpaid balance be taken into consideration in calculating the borrower’s debt to income ratios
• For example, if a borrower has $10,000 of unpaid collection account balance, then 5% of the $10,000 or $500 be used as a monthly expense in calculating the borrower’s debt to income ratio even though they do not have to pay it
• If the borrower has a large unpaid collection balance and the 5% calculation will disqualify them due to the high debt to income ratios, then the borrower can set up a written payment agreement with the creditor
• They can agree on a monthly payment and that monthly payment will be used in lieu of the 5% factor in calculating the debt to income ratios
• This is for non-medical collection accounts only and not medical collection accounts
• Medical collection accounts are exempt from the 5% debt to income ratio calculation
• Charge offs are exempt also

Credit Disputes During Mortgage Process Will Halt Process

As mentioned earlier, medical credit disputes with balances are alright and exempt from the credit dispute rules.

• Charge offs are okay to have and will not affect someone in qualifying for an FHA Loan
• However, mortgage applicants cannot have a credit dispute on a charge off account
• The credit dispute on a charge off account needs to be retracted and removed from the credit report before the mortgage process can proceed
• With non-medical collection accounts with zero balances, credit disputes during mortgage process are exempt
• It will not affect the mortgage loan process
• As long as the total amount of credit disputes are under $1,000, then it is exempted also on non-medical collection accounts
• Any non-medical credit disputes over $1,000 or greater need to be removed before the mortgage loan process can proceed

Dangers Of Retracting And Removing Credit Disputes

A pre-approval letter with credit disputes will be null and void until the credit disputes are retracted and removed.

• One of the major issues with retracting a credit dispute is that once the credit dispute is retracted and removed off someone’s credit report, their credit scores will drop
• How much will it drop?
• It depends on each individual
• I have seen someone’s credit scores just drop 10 FICO points from retracting a credit dispute
• Sometimes, I have also seen someone’s FICO credit score plummet 50 FICO points with just one credit dispute retraction
• Potential homebuyers are planning in buying a home in the near future, make sure to have all of the credit disputes retracted before applying for a mortgage loan
• Homebuyers do not want to be in a hurry to purchase and close on a home loan while in a credit repair program

Home Buyers needing to qualify for government or conventional loan with a direct lender with no mortgage overlays on FHA, VA, USDA, and Conventional Loans, please contact us at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.