This BLOG On Credit Disputes During Mortgage Underwriting Process Guidelines Was Written By Michael Gracz of Gustan Cho Associates
How Credit Disputes During Mortgage Underwriting Process Can Disqualify Borrowers:
Credit Disputes During Mortgage Process is not allowed. Loan Officers should not issue any pre-qualification and/or pre-approval letters if a mortgage applicant has any credit disputes on non-medical collections and/or derogatory tradelines.
The only credit disputes exempt and allowed during mortgage process are the following:
- Non-Medical Collection Accounts with aggregate credit balance of under $1,000
- Medical Collections
- Non-Medical Collections with zero balances
All credit disputes during mortgage process needs to be retracted. Unfortunately, when consumers retract credit disputes, credit scores can drop. Sometimes, it drops significantly where the borrower no longer qualifies for mortgage due to scores falling below the minimum credit scores required.
How To Retract Credit Disputes
How to remove disputes, the fastest way!
- Call the creditor in question directly
- Tell the creditor in question that the account is no longer in dispute and request retraction
- Request and instruct creditors to notify to report to the bureaus that the account is no longer being disputed
- This is the most important step and is often overlooked
- Contacting the credit bureaus and removing the dispute is the whole purpose of retracting the credit disputes
- There are instances where creditors do not realize this does
- Next time they report on their 30-day cycle, the dispute usually reappears
- Next, contact ALL THREE credit bureaus with a phone call
- When connected with a representative please go over each account in detail
- Be clear that you are no longer disputing the account
- Confirm they remove all (non-medical) disputes
- While on the phone ask for an exact date they will be updated
- Usually takes up to 72 business hours. Keep track of these dates
- Once that time period has elapsed, we can re-pull and update credit report
- It is very important to keep track of the exact date credit bureaus say it will be removed
- The following morning the report can be pulled. If the report is pulled too early, borrowers do risk unnecessary pulls of credit
Case Scenario Credit Disputes During Mortgage Underwriting Retraction
Credit Disputes During Mortgage Underwriting is not allowed and will automatically halt the mortgage process.
- Borrowers have two active disputes
- One with ABC Bank for $1500
- One with XYZ Collection Agency for $1250
- Call ABC Bank and XYZ Collection Agency
- Let them know no longer are disputing the account
- Confirm they will report that information to the bureaus
- Now it is time to contact all three bureaus
- Confirm with them the exact date they will remove the dispute
- When that day arrives, contact Loan Officer and they will update report the following morning
Credit Report And Credit Bureaus
Lenders will pull a tri-merger credit report and use the borrower’s middle credit scores in qualifying for mortgage credit score.
Below is the contact information for the three credit reporting agencies:
- Experian- 1 866 200 6020
- Equifax – 1- 866-349-5191
- TransUnion – 1-800-916-8800
Why Credit Disputes During Mortgage Underwriting Is Not Allowed
The credit bureaus processes millions of pieces of data each day, so mistakes are going to happen.
- When they do, the Fair Credit Reporting Act (FCRA) allows consumers to protest that incorrect information
- They have very specific laws and timeframes for these requests to be completed
- They have allowed consumers to dispute these accounts with just the tips of their fingers
- Today thousands of consumers dispute accounts directly on the credit bureaus’ websites
- Once the account is disputed, the Fair Credit Reporting Act gives the bureaus 30 days to render a decision
- Most of the time this does not go in favor of the consumer
- The dispute verbiage can stay on the account
- This is where the confusion starts
- It is important to CLOSE the disputes once the decision is made
- Otherwise when it is time for you to obtain a mortgage you will be wasting 3-5 days getting an accurate credit report
- While an account is in dispute, the credit bureaus are required to add a label to the account saying, “IN DISPUTE”.
- While in dispute the account is taken out of the scoring model
- Temporarily resulting in a higher credit score
- Since this is a common practice, the major lending institutions such as the FHA, VA, Freddie Mac, and Fannie Mae have clear guidelines on how to treat disputed accounts
- They understand that the dispute makes your true credit profile hard to analyze, which is why they require the removal of the verbiage “IN DISPUTE”
FHA Guidelines On Credit Disputes During Mortgage Underwriting
Disputed accounts in the eyes of the HUD.
The U.S. Department Of Housing And Urban Development (HUD) is the parent of FHA. This can get tricky to the untrained eye.
The FHA has two categories of disputes:
- Derogatory Disputes
- Non-Derogatory Disputes
As referenced in the HUD 4001.1 FHA Handbook has a specific way of interpreting each of the two disputes.
Disputed Derogatory Credit Accounts.
Disputed Derogatory Credit Account under the eyes of HUD are the following:
- charge off accounts
- collection accounts
- derogatory credit accounts with late payments in the last 24 months
- $1,000 or more collectively in Disputed Non-Medical Derogatory are exempt from credit disputes
- If credit disputes remain, then the borrowers file needs to be down graded to manual underwriting
Exempt From Credit Disputes During Mortgage Underwriting
The following types of derogatory credit tradelines are exempt from credit disputes:
- Medical Collection Disputed Accounts
- Credit Disputes which are from being a victim of identity theft and/or unauthorized usage
- In order to exempt these the mortgage borrower needs to provide and include copy of an official police report and/or other supporting documents by the creditor
- Credit Accounts of non-borrowing spouse in a community property state
- Non-derogatory credit accounts are exempt from credit dispute retractions
The following credit disputes during mortgage underwriting process are exempt from credit disputes:
- collection accounts with zero balances
- disputed accounts with late payments that are aged longer than 24 months
- credit disputes that are in current standings and is being paid as agreed
Depending on the AUS findings per the FHA TOTAL Scorecard, the loan may need to be downgraded to a manual underwrite. Best news is my team over at USA Mortgage specializes in FHA Manual underwrites. Please contact me to start mortgage pre-approval today!
This is very cut and dry. Many lenders have their own set of rules added to these guidelines, those are called lender overlays. Please see https://gustancho.com/what-are-lender-overlays for more details on overlays.
About The Author Michael Gracz Of Gustan Cho Associates
Mike Gracz is a Senior Loan Officer and National Sales Manager for The Gustan Cho Team at Gustan Cho Associates. Michael Gracz is also a staff writer and contributing editor for Gustan Cho Associates Mortgage News. Michael Gracz is in charge of all loan officer at Gustan Cho Associates and is on call 7 days a week to help borrowers with less than perfect credit or those who have had a last minute mortgage denial or are stressing during mortgage process. Mike represents a lender with no mortgage overlays on government and/or conventional loans. Mike Gracz is also an expert on non-qm loans and bank statement mortgage loans for self employed borrowers. Borrowers who need to qualify for a mortgage with a direct lender with no mortgage overlays, please contact Mike Gracz at Gustan Cho Associates at 630-659-7644 or text for faster response. Or email Mike at email@example.com. Michael Gracz is available 7 days a week, evenings, weekends, and holidays.