Credit Disputes During Mortgage Underwriting Process

In this article, we will cover and discuss credit disputes during mortgage underwriting process. How Credit Disputes During  Mortgage Underwriting Process Can Disqualify Borrowers. Credit Disputes During Mortgage Process are not allowed. There are exempt disputes that do not have to be removed which we will discuss later in this article. 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.

How Credit Disputes Can Halt The Mortgage Process

How Credit Disputes Can Halt The Mortgage Process

Pre-approval letters with outstanding credit disputes are null and void. Issuing pre-approval letters with outstanding credit disputes will backfire on the homebuyers, home sellers, and loan officers. Loan Officers need to thoroughly review the borrower’s credit report and look for outstanding credit disputes prior to issuing a pre-approval letter.

Always Check For Credit Disputes Prior To Issuing a Pre-Approval Letter

Mortgage processors should always check and double-check borrower’s credit reports to make sure there are no non-medical non-exempt credit disputes prior to submitting the borrowers’ mortgage file to underwriting. Mortgage underwriters will automatically suspend a file with outstanding credit disputes. Suspended files are what cause delays in the mortgage process and can delay the clear to close and home closing. In this article, we will discuss and cover Credit Disputes During Mortgage Underwriting Process.

Exempt Credit Disputes During Mortgage Underwriting Process Guidelines: Disputes Exempt From Retraction

The only credit disputes exempt and allowed during the mortgage process are the following:

  • Non-Medical Collection Accounts if all creditors outstanding aggregate credit balance totals under $1,000
  • Medical Collections
  • Non-Medical Collections with zero balances
  • Non-medical outstanding collection accounts with zero balance
  • Any credit disputes on non-medical collection accounts and/or derogatory credit tradelines that are two years old or older are exempt from retraction of credit disputes

All non-exempt credit disputes need to be removed during the mortgage process. Unfortunately, when consumers retract credit disputes, credit scores can drop. Sometimes, it drops significantly where the borrower no longer qualifies for a mortgage due to scores falling below the minimum credit scores required.

How To Retract Credit Disputes

How to remove disputes, the fastest way!

  1. Call the creditor in question directly
  2. Tell the creditor in question that the account is no longer in dispute and request retraction
  3. Request and instruct creditors to notify to report to the bureaus that the account is no longer being disputed
  4. This is the most important step and is often overlooked
  5. Contacting the credit bureaus and removing the dispute is the whole purpose of retracting the credit disputes
  6. There are instances where creditors do not realize this does
  7. The next time they report on their 30-day cycle, the dispute usually reappears
  8. Next, contact ALL THREE credit bureaus with a phone call
  9. When connected with a representative please go over each account in detail
  10. Be clear that you are no longer disputing the account
  11. Confirm they remove all (non-medical) disputes
  12. While on the phone ask for an exact date they will be updated
  13. Usually takes up to 72 business hours
  14. Keep track of these dates
  15. Once that time period has elapsed, we can re-pull and update the credit report
  16. It is very important to keep track of the exact date credit bureaus say it will be removed
  17. The following morning the report can be pulled. If the report is pulled too early, borrowers do risk unnecessary pulls of credit

Here is a useful link on HOW TO REMOVE CREDIT DISPUTES

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 the 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

Credit Report And Credit Bureaus

The credit bureaus process 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.

How Credit Disputes Work and How To Retract To Proceed With The Mortgage Process

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.

Impact on Credit Scores When Credit Tradelines Are In Dispute

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:

  1. Derogatory Disputes
  2. 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

Credit Disputes During Mortgage Underwriting

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 borrower’s file needs to be downgraded 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 a copy of an official police report and/or other supporting documents by the creditor
  • Credit Accounts of a non-borrowing spouse in a community property state
  • Non-derogatory credit accounts are exempt from credit dispute retractions

Credit Disputes Exempt From Retraction

The following credit disputes during the 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 are 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. The best news is our team of mortgage professionals at Gustan Cho Associates specializes in FHA Manual underwrites. Please contact us at Gustan Cho Associates 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 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 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 officers 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 the 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 a faster response. Or email Mike at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

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