Derogatory Credit Disputes During Mortgage Process

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This BLOG On Derogatory Credit Disputes During Mortgage Process Was PUBLISHED On March 20th, 2019

Derogatory Credit Disputes During Mortgage Process is generally not allowed with a few exceptions.

  •  Derogatory Credit Disputes During Mortgage Process can cause a major headache
  • Loan Officers often make the mistake of issuing a pre-approval letter to borrowers with active derogatory credit disputes
  • This is one of the biggest mistakes loan officers can make
  • Over 75% of our borrowers at Gustan Cho Associates are folks who either gotten a last-minute mortgage denial or are stressing over their mortgage process because the loan officer did not properly qualify borrowers
  • One of those reasons is issuing pre-approval letters to borrowers with derogatory credit disputes

Derogatory credit disputes during the mortgage process are normally not allowed. There are certain exemptions to this rule which we will discuss in this blog.

How Credit Disputes Work

Credit disputes is often used by credit repair companies to delete derogatory credit tradelines.

  • How this works is, consumers, can dispute negative items from their credit reports by sending certified letters to credit bureaus
  • Most disputes state that the derogatory item is not the consumers
  • The credit bureau, in turn, will notify the creditor in question
  • The creditor has 30 days to respond with the validity of the negative tradeline
  • If the creditor does not respond, the credit bureaus need to remove the disputed item
  • However, this is not how it works in many cases
  • Many times, removing a credit dispute is next to impossible

Creditors will not remove a credit dispute even though consumers will request it in writing. This can halt the mortgage process indefinitely.

Why Are Credit Disputes Not Allowed By Lenders

When consumers dispute a derogatory credit trade line, the credit bureaus automatically negates the negative factor from the credit scoring formula.

  • This is why when consumers dispute negative trade lines, their credit scores go up
  • This is because once the dispute triggers, the scoring formula discounts the negative factor, therefore, the negative item is not factored in
  • The item will remain on the credit report but not the negative factoring formula
  • When credit disputes are removed and the derogatory stays on the report, consumer credit scores will drop

A credit score with active credit disputes is not a true credit score. This is the reason why lenders do not allow credit disputes.

Exempt From Removing Disputes

Non-medical collection account credit disputes do not have to be removed. Any non-medical credit trade lines with zero balances do not have to remove. Any non-medical derogatory credit disputes that are 24 months or older do not have to be removed. Non-medical disputes with an aggregate outstanding balance totaling less than $1,000 are exempt from retracting credit disputes. If there are many active credit disputes, the borrower’s file can be downgraded to a manual underwriting on VA and/or FHA Loans. Borrowers with borderline credit scores with substantial credit disputes may not want to retract their credit disputes because it may drop their credit scores. Situations like these should be downgraded to a manual underwrite. 

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