Disputing Derogatory Credit During Mortgage Approval Process


This BLOG On Disputing Derogatory Credit During Mortgage Approval Process Was UPDATED On February 11th, 2019

Homebuyers who are thinking of hiring a credit repair company or thinking of doing credit repair need to realize that there are new rules on disputing derogatory credit during mortgage process. Borrowers disputing derogatory credit during mortgage process will be facing delays.

  • Disputing derogatory credit is not allowed for non-medical collection accounts on with outstanding balances of over $1,000 during the mortgage process
  • Borrowers can dispute derogatory credit items that are non-medical creditors with zero balance
  • Borrowers cannot dispute charged off account and/or late payments
  • Borrowers with non-medical creditors charged-off accounts, late payments  need to retract the derogatory credit dispute
  • Unfortunately, retracting derogatory credit disputes will lower credit scores
  • There are cases where a mortgage applicant had to retract several derogatory credit dispute and once the disputes were retracted, credit scores plummeted over 80 points
  • Major drop in credit scores due to retracting credit disputes can disqualify borrowers
  • Disputing derogatory credit on medical collections are exempt
  • Medical collection credit disputes is allowed
  • Do not have to retract the derogatory credit disputes

Credit disputes on non-medical collections and/or derogatory credit tradelines over 24 months are exempt from retractions.

Process Of Disputing Derogatory Credit

Credit bureaus do misreport information on the credit report that is inaccurate, not consumers, or derogatory information that does not belong to the consumer.

All the three credit bureaus need to respond to any consumer that has a credit dispute

  • A credit dispute is when a consumer will notify the credit bureaus in writing via certified mail and/or online disputing derogatory credit
  • The dispute can just state that the derogatory credit reporting on the consumer’s credit report is not correct
  • The credit bureau then has 30 days to contact the creditor and/or collection agency and complete their investigation
  • If the creditor and/or collection agency does not respond back to the credit bureaus within the 30 days mandated by law, the credit bureaus need to remove the disputed derogatory item off the credit report

Credit Disputes By Credit Repair Companies

Disputing derogatory credit is the most common method used by credit repair companies to remove derogatory items off a consumer’s credit report. Unfortunately, credit disputes can backfire on borrowers during the mortgage process.

  • The older the derogatory credit item is, the easier it is to remove a derogatory credit item
  • This because many times older derogatory credit tradelines are harder to verify and/or have been sold to multiple collection companies
  • Nothing is wrong with disputing derogatory credit
  • However, keep in mind that disputing derogatory credit that is non-medical account with a balance greater than $1,000 need to be retracted during mortgage process.

Why Lenders Do Not Allow Credit Disputes During Mortgage Process

Whenever there is a credit dispute on a derogatory credit item, the credit bureaus automatically negate the negative credit tradelines in dispute from the credit scoring model. What this does it instantly increases consumer credit scores. Reason for the increase on credit scores when consumers dispute is because the credit scoring formula takes the negative item from scoring formula so the negative item is non-existent. The derogatory item still remains on credit report and the verbiage on credit report states that consumer is disputing the tradeline.

Once the dispute has been resolved and the credit bureaus removes the verbiage two things happens:

  • If the item in question is verified, the verbiage on credit report states resolved and borrowers credit scores will drop 
  • Reason for the drop is because the negative factor is factored back in
  • If creditor did not verify, the item gets deleted

Disputes on credit tradelines older than 24 months old are exempt from retracting.

Disputing Medical Collections

One of the tricks some loan officers use during mortgage process is dispute medical collections. Medical collections are exempt from credit disputes. Disputing medical collections is allowed by lenders with no overlays. Any credit disputes will automatically raise borrowers credit scores. If a borrower is short a few points in qualifying for mortgage, borrowers can dispute medical collections and their scores will go up. Once the dispute is verified and resolved, the borrowers credit scores will go back down.

Gustan Cho


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