Disputing Bad Credit During Mortgage Process Can Halt Loan Process

This BLOG On Disputing Bad Credit During Mortgage Process Was Updated On May 14, 2017

Having good credit is a necessity these days.

  • Consumers should always review their credit report and look for inaccuracies and errors.
  • Low credit scores due to errors on credit reports will cost consumers higher interest rates and interest expense.
  • A lower credit score can cost homeowners tens of thousands of dollars over the life of a mortgage loan. 
  • A lower credit score can also cost thousands on an automobile loan, credit cards, insurance premiums due to higher interest.
  • Bad credit can cost people jobs. 
  • Many employers utilize credit checks as part of their hiring process. 
  • A bad credit score may be taken by an employer that an individual is not financially responsible and may deny the applicant a job offer or job promotion. 
  • All mortgage loan originators must pass both a criminal background investigation and a credit check prior to being granted a mortgage loan originator’s license. 
  • There are many states that will not issue a loan officer a MLO license due to poor credit.
  • Every year, mortgage loan originators have to submit to a credit check in order to renew their licenses as well.

Most consumers go about disputing credit in order to fix errors or inaccuracies from their credit report. Unfortunately, disputing bad credit during mortgage process is not allowed .

Inaccuracies And Errors On Credit Reports

Everyone should check their credit report at least once a year by disputing bad credit on their credit report.

  • It does not cost anything disputing errors or inaccuracies or bad credit to the credit bureaus. 
  • By law, everyone is entitled to a free credit report every year from each of the three credit bureaus.
  • The main credit reporting agencies are Transunion, Experian, and Equifax. 
  • Always document and make copies of every dispute letter as well as copies of credit reports and keep diligent notes. 
  • When contacting credit bureaus and if contact is made with a representative make sure that time, date, name of the person talked to and what was discussed is documented.
  • Make sure that whenever a written credit dispute is sent to any credit reporting agency that it via certified mail and request a return receipt. 
  • Being organized is key in taking on the task disputing errors and inaccuracies on credit report.

Fair Credit Reporting Act

Under the Fair Credit Reporting Act ( FCRA ), consumers have the following rights:

  • One of the most important reason why documentation is so important is because under the FCRA, Fair Credit Reporting Act, credit reporting agencies have 30 days to respond to a consumer credit dispute.
  • If creditors do not respond to consumer credit disputes with verification that the item reporting on the consumer credit report is correct, the credit bureaus needs to correct and/or delete the negative item.
  • If their credit investigation of credit dispute lingers on longer than 30 days, the credit reporting agency must delete the disputed item. 
  • With proper documentation like certified mail return receipt being requested, consumers have proper documentation for the credit reporting agency to remove the negative item if they did not get back to your with a response within the 30 day deadline.

Disputing Bad Credit Items Online Or by Mail

Consumers have the option of disputing derogatory credit items online or via mail.

  • I strongly recommend to always dispute via certified mail because of documentation purposes.
  • Consumers with many derogatory items on your credit report should dispute all the negative item all at once on a letter format, listing the negative line items and account numbers and state that those items are not yours. 
  • The credit reporting agency will then contact the creditor who is reporting or reported you for verification. 
  • If the creditor fails to respond or verify that the debt is yours, the credit reporting agencies must delete the negative item. 
  • Consumers with multiple derogatory negative credit items can have over 20% of their derogatory credit items deleted after the first dispute.  
  • Consumers will need to repeat this process of disputing several times before most of the negative credit derogatory items from credit report is deleted. 

Credit Scores And Mortgage Rates

Credit scores determine mortgage interest rates. Borrowers with credit scores above 700 will get better mortgage rates than borrowers with a credit score in the 600s.

  • Consumers can get bankruptcies, foreclosures, judgments, tax liens, collections and judgments deleted from credit report.
  • However, mortgage applicants cannot lie on mortgage applications that they do not have a prior bankruptcy and/or foreclosure or other public records from the disclosure questionnaire.
  • Deletions of collections, late payments, or charge off accounts is fine because nobody can find out about the deletions on these types of bad credit deletions.
  • However, deletions of public records such as bankruptcies, foreclosures, short sales, deed in lieu, judgments, and other public records will be discovered by lenders when they do a third party national public records search during the mortgage process.

Disputing Bad Credit During Mortgage Process Can Halt The Loan Process

Nothing is wrong with consumers to dispute bad credit. However, Disputing Bad Credit During Mortgage Process can suspend the mortgage process and may involve great risk with home buyers. Loans officers should never issue a pre-approval letter to home buyers who are Disputing Bad Credit During Mortgage Process because once the borrower retracts the credit dispute, the borrower’s credit scores can drop significantly.

Here are FHA Guidelines On Disputing Bad Credit During Mortgage Process:

  • Borrowers cannot have credit disputes on non-medical collections and charge off collection accounts.
  • Medical collection accounts are exempt from credit disputes.
  • Non-medical collection accounts with zero outstanding balances are exempt from credit disputes.
  • Borrowers who have non-medical collection accounts with a total outstanding unpaid balance of under $1,000, they are exempt from credit disputes.

Why Don’t Lenders Allow Disputing Bad Credit During Mortgage Process?

Here is an outline on why lenders will not allow disputing bad credit during mortgage process:

  • Once a consumer disputes a credit item to any of the credit bureaus, the credit bureau will take that negative credit item off the credit scoring model.
  • By taking the negative credit item off the credit scoring model, it means that the negative derogatory item is taken off the credit scoring formula, therefore, the consumer credit scores will go up.
  • Even though the derogatory credit item remains on consumer credit reports, the verbiage posted by the credit bureau “CONSUMER DISPUTES THE CREDIT ITEM: INVESTIGATION IN PROCESS” will automatically takes out the negative factoring from the consumer FICO scores. 
  • Each credit dispute can boost credit scores by more than 20 or more points depending on how recent the derogatory item is.
  • Once consumers retracts the credit disputes, the negative factor is calculated back in the credit scoring model so consumer credit scores can plummet.

Retracting credit disputes can plummet a borrower’s credit scores. Loan Officers should not issue pre-approval letters for borrowers Disputing Bad Credit During Mortgage Process until the dispute has been retracted.

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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