Credit Repair To Qualify For Mortgages And How It Can Backfire

Credit Repair To Qualify For Mortgages

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will discuss and cover credit repair to qualify for mortgages. Credit repair is often not necessary for home buyers planning on buying a home. Credit Repair does work. Depending on the credit consultant consumers use, derogatory credit tradelines can be removed and deleted from consumer credit reports. I have seen collection accounts, charge-offs, judgments, tax liens, bankruptcies, foreclosures, short sales, and derogatory credit tradelines deleted from a consumer’s credit reports. However, lenders will find out about deletions of public records.

Negative Public Records

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Examples of public records are tradelines such as the following:

  • bankruptcies
  • foreclosures
  • tax liens
  • child support payment delinquencies
  • judgments

Public records are discovered when lenders do a third-party national public records search during the QC Underwriting Review Process.

Public Records Deletions Credit Repair To Qualify For Mortgages

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When borrowers apply for a mortgage loan, they need to complete a 4-page application called the 1003 mortgage application.The last page of the 1003 mortgage application, there will be a series of questions will be asked. Examples of disclosure questions asked on 1003 are questions such as the following:

    • have you filed for bankruptcy
    • have you had a short sale
    • any foreclosures, deed in lieu
    • any judgments
    • is the applicant a defendant party to a lawsuit

Deleting Bankruptcy and Foreclosure From Credit Report During the Mortgage Process

Mortgage applicants need to be truthful when answering these questions. Credit Repair does work. We have seen countless consumers with public records such as bankruptcies, foreclosures, and judgments deleted from their credit reports from all three credit bureaus. Unfortunately, marking that consumers have not filed for bankruptcy or had foreclosure but deleted on their credit report, lenders will find out during the final stage of the mortgage approval process, which is the QC Underwriting Review Process.

Once the mortgage loan application is about to get cleared to close or with some companies, the loan is cleared to close, and the file goes to the Quality Control Division of the mortgage company. This is where a QC underwriter will contract with a third-party vendor to do a national public records search.

The third-party vendors, companies like Lexis Nexis or Data Verify, will thoroughly search public records at the national level. Any public records on borrowers will show up. All public records deletions from credit repair will appear on the public records search. Often, credit repair to qualify for a mortgage can do more damage than good for mortgage borrowers.

Credit Repair to Qualify for Mortgages

Why Do Credit Repair To Qualify For Mortgages?

The good news on credit repair is that unpaid collection accounts and charge-offs or delinquent accounts deleted from the consumer’s credit report will not register on public records. Nobody will find out about it. Lenders do not just look at the borrower’s credit scores.

Mortgage lenders will look at the borrower’s overall credit history. Consumers do not have to pay off outstanding unpaid collection accounts to qualify for owner-occupant home mortgages. Homebuyers can qualify for Home Loans with outstanding collection accounts and charge-off accounts without paying them.

Medical collection accounts and charge-offs are exempt from debt-to-income ratio calculations. Non-Medical collection accounts with an aggregate total outstanding unpaid collection account balance of greater than $2,000, 5% of the outstanding balance is used to calculate the borrower’s debt-to-income ratio.

Using 5% of Outstanding Collections As Hypothetical Debts by Mortgage Underwriters

On a $10,000 outstanding unpaid collection account balance, 5% of the $10,000, or $500, will be used as the borrower’s monthly debt. This holds true even though the borrower does not need to make any payments. By deleting the collection account through credit repair, the 5% calculation of the outstanding debt will no longer apply since it has been removed from the credit report. It needs to be removed by all three credit reporting agencies.

Choosing The Right Credit Repair Company

Like other industries, not all credit repair companies provide the best services. There are hundreds if not thousands, of credit repair companies. Choosing the right credit repair company can be challenging.

Do not fall into fancy websites or ads with fake testimonials. The place to start shopping for the best credit repair companies would be to ask for referrals from realtors, mortgage brokers, bankers, attorneys, or other professionals who use credit repair services.

I use only one credit repair consultant who has helped hundreds of my borrowers with less-than-perfect credit and would refer even my own family. Most mortgage brokers work closely with credit repair companies. Can ask loan officer who they recommend for credit repair

Credit Disputes Will Halt The Mortgage Process

Home Buyers who are thinking of starting credit repair to qualify for mortgages need to realize that credit repair takes time. Most often than not, credit repair is not necessary to qualify for mortgages. There are many instances where going through credit repair during the mortgage process can do more damage than good.

Mortgage lenders prohibit credit disputes during the mortgage process. Consumers can have credit disputes on medical collection accounts with outstanding balances and non-medical collection accounts with zero balances. However, borrowers cannot have credit disputes on non-medical collection accounts if the outstanding unpaid collection balances are over $1,000.

Non-medical collection accounts credit disputes need to be retracted for the mortgage process to proceed. Another major issue with retracting credit disputes with outstanding collection account balances is that credit scores will drop once consumers retract the credit disputes.

How Removing Credit Disputes Will Drop Credit Scores

The reason why credit disputes during the mortgage process are prohibited is whenever consumers dispute derogatory credit tradelines. 

The credit bureau credit scoring model will automatically delete the derogatory tradeline in question from the scoring formula. What this means is that the verbiage credit in dispute: Under Investigation. This verbiage automatically triggers the negative points from the scoring formula. Credit disputes will often raise consumer credit scores.

On the flip side, retracting credit disputes will drop credit scores. How much will it drop? It can drop anywhere between 5 points to over 100 points. Mortgage loan officers should not issue pre-approval letters if applicants have credit disputes. Many times borrowers who qualify for a mortgage loan with credit scores may NOT meet the minimum credit score requirements to qualify for a mortgage after the retraction of credit disputes.

Gustan Cho Associates Can Help Borrowers With Low Credit Scores Boost Scores To Qualify For A Mortgage

Borrowers with low credit scores and prior bad credit and need help qualifying for a mortgage loan, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at

We are different than other mortgage lenders who will not tell our borrowers to come back in a year after they have improved their credit. Our staff will guide our borrowers, help them get their credit to where it needs to be, and work with all of our borrowers to make the American Dream Of Home Ownership a reality.

We often help those who want to be homeowners for many months so they can qualify for a home loan and get pre-approved.    

Credit Repair To Qualify For Mortgage Loan During Loan Process

Millions of Americans have bad credit due to the financial meltdown of 2008. Everyone heard of credit repair. Credit Repair is a big business; many consumers get mailers from credit repair companies.

If you need to correct errors on your credit report, there is nothing wrong with hiring a credit repair company. However, you will do more damage than good if you intend to hire a credit repair company to dispute valid derogatory credit tradelines. But there are dangers in doing Credit Repair To Qualify For Mortgage Loan.

Credit Disputes are not allowed during the mortgage process. Do not start any credit Repair To Qualify For Mortgage Loan unless you first consult with a loan officer. Credit repair can do more damage than good during the mortgage process.

Credit Repair To Qualify For Mortgage Loan Can Often Do More Damage Than Good

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There are many instances where Credit Repair To Qualify For Mortgage Loan can do more damage than good. I know hundreds of folks who have bad credit. This is because they fell behind in paying their bills due to loss of business, layoffs, or situations like divorce or medical issues. Others have filed for bankruptcy, had a foreclosure, fallen behind in paying their taxes so had tax liens or fallen behind on their payments.

FHA Loans With Bad Credit and Collection Accounts

Outstanding collections, charged-off accounts, late payments, and other derogatory credit tradelines older than two years old have little to no impact on credit scores. You can do credit disputes if you have documentation proving the creditor and credit bureaus made a mistake. However, disputing every derogatory credit is very dangerous, and you will not succeed. Bad credit tradelines get removed from your credit report seven years after the date of the last activity.

Credit Repair To Qualify For Mortgage Loan: What Is Credit Repair?

Credit repair is deleting derogatory items off credit reports through credit disputes. Once consumers have a recent late payment on their credit report, it will drop scores by at least 30 points or more. However, the late payment has little or no effect as time goes by.

Late payments, collections, charge-offs, bankruptcy, foreclosure, and other derogatory have little or no impact on credit scores after two years. There is no need to delete older derogatory items from the credit reports.

Credit scores that drop because of the derogatory will naturally improve as time goes by. However, derogatory credit tradelines may not look good on the credit report and stay on the credit report for seven years.

Homebuyers Can Qualify For A Mortgage With Prior Bad Credit and Credit Scores Down to 500 FICO

It is fine for derogatory credit tradelines to remain on credit reports. Lenders and other creditors will understand periods of bad credit happen to the best of us. As the derogatory credit tradelines age, creditors will ignore it and your credit scores will not have any negative impact.

Bankruptcies stay on the credit report for ten years, while Chapter 13 Bankruptcy remains on your credit report for seven years. Judgments will remain on the credit report for seven years, although most judgments are good for ten years.

The Statute Of Limitations on Judgments depends on each state. Although it does not happen often, judgment creditors can renew judgments for another ten years after the statute of limitations.

Deleting Derogatory Credit Items Versus Credit Scores

Repairing credit might not necessarily improve credit scores. Deleting an old derogatory will probably not improve scores. Removing credit disputes will lower credit scores.

Removing bad credit makes your credit profile looks cleaner, and consumers get a head start in getting it removed before the 7-year waiting period. However, you cannot have credit disputes during the mortgage process.

When you dispute a derogatory credit tradeline, the credit bureaus will remove the negative factor from their credit scoring model. Therefore your credit scores will go up when you dispute anything.

Retracting Credit Disputes Can Plummet Credit Scores

When you remove a credit dispute, the credit bureaus will re-enter the negative factors of the derogatory credit tradeline. Therefore, if you remove the credit dispute, your credit scores will drop because the credit bureaus factored the negative scoring formula into your credit report.

Medical credit disputes are exempt. Medical credit disputes with zero balance are exempt. Any non-credit disputes on non-medical collections older than 24 months from the last activity are exempt. If you have non-medical disputes from creditors, the aggregate total is less than $1,000.

They are exempt from removing the disputes. All pre-approvals issued with credit disputes are null and void. Credit scores with credit disputes do not reflect the true credit scores of the borrower.

Late Payments After Bankruptcy and Foreclosure Can Be Deal Killer

For mortgage borrowers who are planning on applying for a mortgage loan after a bankruptcy and/or a foreclosure, most lenders do not want a mortgage borrower to have a late payment after a bankruptcy or foreclosure. Late payment after bankruptcy, foreclosure, short sale, or deed in lieu of foreclosure is considered a second offense.

Many mortgage companies will not accept borrowers with late payments after BK, Foreclosure, or Short Sale. Late payments are next to impossible to get rid of through credit repair.

Although credit scores might not improve, it is wise to get the late payments after a bankruptcy and foreclosure removed from the credit report if at all possible. This can be done by calling the creditors and asking them for one-time forgiveness. It may not work, but it is worth a try.

How To Get Mortgage Approval With Late Payments After Bankruptcy and Foreclosure

Dangers With Credit Repair To Qualify For Mortgage

If you have late payments after bankruptcy or foreclosure, the best thing to do is to get new secured credit cards to offset the late payments. Get three to five additional secured credit cards with at least a $500 credit limit. Never be late, and monitor your credit report. Get signed up with a third-party credit monitoring service like Credit Karma.

Establishing New Credit Will Improve Credit Scores

If intentions are to improve credit scores, consumers need to establish new credit. For mortgage applicants with low credit scores, the chances of getting an unsecured credit card are very slim. I strongly recommend that consumers get three secured credit cards. Each credit card should be able to boost the credit score by at least 20 points. However, please keep the balance below 10% of the available credit limit. Consumers will get the maximum optimal effect by having three revolving secured credit cards.

Installment Loans To Boost Credit Scores

Try also to get an installment loan, such as an automobile loan. It is difficult for someone with bad credit to get an automobile loan, but it is possible putting a substantial amount down. Get a used car and put 50% or more down. For example, car buyers with the cash to purchase a $3,000 car. consider putting in a $2,000 down payment and getting a loan for $1,000. The interest paid is well worth the credit improvement this automobile loan will do.

Whether consumers do credit repair themselves or hire a credit repair company, credit repair is a long process and cannot be done overnight. It will take consumers months if not over a year to repair credit.

Credit repair is a good thing for everyone, but remember that credit repair does not necessarily improve credit scores. Consumers need new credit and active credit for their credit scores to improve. Consumers can do both, delete derogatory items and establish new credit, which will be a winning combination.

Importance of Monitoring Credit Report For Errors

Please monitor credit reports a few times a year and ensure there are no errors. Credit reporting agencies are known for reporting incorrect items on consumers’ credit reports. You can initiate a credit dispute with supporting documentation if you have valid paperwork proving that the credit bureaus are reporting wrong information. If you are disputing valid derogatory credit tradelines without documentation, you will be hurting yourself more than helping.

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