Dangers Of Credit Repair During Mortgage Application Process

This BLOG On Dangers Of Credit Repair During Mortgage Application Process Was UPDATED On November 10th, 2017

Credit repair is the process of trying to correct errors from credit report by disputing the inaccuracies to the three major reporting agencies.

  • Credit repair is also trying to remove and/or delete accurate derogatory items by disputing it to the three major credit reporting agencies in the hopes the creditor does not respond to dispute within the 30 days mandated by law. 
  • Anyone consumer can dispute a derogatory credit item. 
  • Once a consumer disputes a derogatory item to the three credit reporting agencies, the credit reporting agencies will relay the dispute to the creditor that is reporting the negative item to credit report. 
  • The creditor has 30 days to respond back to the credit reporting agencies with validation of the why they are reporting consumer late or as delinquent. 
  • If the creditor does not respond back to the credit reporting agencies within the 30 days mandated by law, the credit reporting agencies need to delete the disputed item or else they are in violation of Federal law. 
  • However, credit repair may back fire when borrowers are applying for a residential mortgage loan.

Dangers Of Credit Repair During Mortgage Application Process: Credit Disputes With Balances Are Not Allowed

Home buyers or homeowners needing refinance who are undergoing credit repair either prior or during the mortgage process need to make sure they understand the danger of credit repair during mortgage application process.

Credit Disputes are not allowed on the following:

  • Non-Medical Collections
  • Late Payments
  • Charge offs
  • Tax Liens
  • Judgments

Disputing Credit During Mortgage Process

One of the dangers of credit repair during mortgage application process is that credit disputes are not allowed with certain exemptions:

  • Mortgage borrowers can dispute derogatory items with zero balances or charge offs
  • But if  borrowers who dispute a collection account or credit account that still has an outstanding balance with a total aggregate amount of $1,000 or more, the mortgage application process will be suspended until the dispute is removed/retracted and/or paid off in full and reflected on their credit report 
  • This normally takes time and will delay mortgage process anywhere from 30 to 90 days unless a rapid rescore is done, which can be costly.

Dangers Of Credit Repair During Mortgage Application Process: Retracting Disputes Will Lower Credit Scores

Another dangers of credit repair during mortgage application process is that retracting credit disputes can plummet credit scores where they can not qualify for mortgage due to not meeting the minimum credit score requirements. If borrowers retract a credit dispute on a recent collection account with an outstanding credit balance, the chances are that credit scores will drop.

  • Depending on how many disputed items are active, credit scores can drop significantly once disputes are retracted from the credit reporting agencies. 
  • Another risk factor is that the creditor might not let consumers retract the dispute.
  • If this is the case, the mortgage application process will be delayed indefinitely until the disputed items are settled.

Why Are Credit Disputes Not Allowed During Mortgage Process?

The main reason that credit disputes are not allowed during mortgage process is because of the following reasons:

  • When consumers disputes any derogatory item such an outstanding collection account, charge offs, late payments, tax liens, judgments, the credit bureaus automatically takes out the derogatory credit item from their credit scoring formula
  • What this means is even though the derogatory credit item remains on the consumer credit reports, the negative factor is excluded from the the credit scoring model so the scoring formula will automatically take out the negative
  • What this does is the credit formula will treat it like the negative item does not exists and the consumer credit scores will go up
  • How much does it increase? This depends on how recent the derogatory is
  • For example, a recent late payment on a car loan can drop over 50 points from a consumer credit score
  • Disputing the late car loan payment, the credit bureaus will negate the recent late payment so the consumer credit scores will go up 50 points
  • The same goes for outstanding collection accounts and charge off accounts
  • Disputing outstanding collections and charge offs will increase consumer credit scores

The above is the main reason why credit disputes are not allowed during the mortgage application and approval process.

Here is a link on how to RETRACT CREDIT DISPUTES TO QUALIFY FOR MORTGAGE

Exempt From Credit Disputes

There are certain exemptions on credit disputes on FHA and VA Loans:

  • Medical Collections are exempt from credit disputes
  • Non-medical credit disputes with zero balances
  • Non-medical collections where the aggregate total (sum of all outstanding collection balances) are under $1,000

With the above, does disputing the above credit scores? The answer is yes. Disputing medical collections, especially if it is a recent medical collection account posted on credit bureaus, the credit reporting agencies will automatically negate the derogatory credit item from the credit scoring formula. The negative item will still remain on the credit report the the verbiage “consumer disputes this account: Not resolved” will remain. However, if the dispute comes back as verified and the credit bureaus will state that dispute resolved, the consumer credit scores will then drop again because the credit reporting agencies will re-factor the negative item back in the credit scoring formula.

Deleting Public Records Off Credit Report To Qualify For Mortgage

Many mortgage borrowers, credit repair companies, and even loan officer think that by removing public records off credit report will qualify borrowers for mortgages.

Deleting the following works:

  • Late Payments
  • Collections
  • Charge Off Accounts
  • Repossessions
  • Mortgage Late Payments (Only if it is longer than 12 months old because all lenders will do a verification of mortgage where they will contact existing lenders of borrowers to see if borrower has been timely in past 12 months)

There is no way of finding out whether or not the above is valid or not if it is not on the borrower’s credit report. The above are not public records. However, on public records, all lenders will do a third party national public records search and all public records will get discovered even though it is not on the borrowers credit report.

Here are examples of public records:

  • Chapter 13 Bankruptcy
  • Chapter 7 Bankruptcy
  • Foreclosure
  • Deed in Lieu of Foreclosure
  • Short Sale
  • Judgments
  • Tax Liens
  • Delinquent federal student loans
  • Court ordered judgments and/or orders such as child support, alimony, etc

There are many credit repair companies, and, unfortunately, loan officers, that are under the assumption that by deleting public records will solve a borrower’s problem in qualifying for a mortgage. This is absolutely not the case.

Think Twice Before Starting Credit Repair

Nothing is wrong with credit repair. However, mortgage borrowers needs to educate themselves on the dangers of credit repair during mortgage application process.

  • However, mortgage borrowers who are intending in applying for a residential mortgage loan, please do not dispute any derogatory credit items unless they are medical collections.
  • A good letter of explanation to the underwriter will do. 
  • Worst case scenario, borrowers can settle to pay the creditor if the creditor is willing to delete the derogatory item.

Mortgage Borrowers who need to qualify for a mortgage with a direct mortgage lender with no overlays, please contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

Gustan Cho NMLS ID # 873293

Related> Does Credit Repair Work?

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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