This Article Is About Disputing Derogatory Credit During Mortgage Approval Process
Mortgage underwriters will automatically suspend and halt the mortgage process if the borrower has credit disputes. Credit disputes on non-exempt credit tradelines are not allowed during the mortgage process. Any credit disputes on consumer credit reports do not reflect a correct credit score. Credit disputes without any valid documentation is often a trick used by credit repair company to delete accurate negative credit tradelines on consumer credit reports.
In this article, we will discuss and cover disputing derogatory credit tradelines during the mortgage process.
The Dangers Of Credit Repair During The Mortgage Process
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 the mortgage process. Borrowers disputing derogatory credit during the mortgage process will be facing delays. Disputing derogatory credit is not allowed for non-medical collection accounts 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 accounts and/or late payments. Borrowers with non-medical creditors charged-off accounts, late payments need to retract the derogatory credit dispute.
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
- 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
- This is because once the borrower retracts the credit dispute, the borrower’s credit scores can drop significantly
Here are the 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.
Impact Of Removing Credit Disputes
Unfortunately, retracting derogatory credit disputes will lower credit scores. Whenever consumers dispute a negative credit tradeline, the credit scoring formula automatically discounts the disputed tradelines from the credit scoring model. Therefore, the disputed credit tradeline is non-existent. The consumer credit scores go up. When the credit dispute is factored back in, the consumer credit scores drop because the negative credit factor is factored back into the credit scoring formula. Therefore, the consumer credit scoring formula reports it as a brand new negative credit tradeline and the consumer credit scores drop.
There are cases where a mortgage applicant had to retract several derogatory credit disputes and once the disputes were retracted, credit scores plummeted over 80 points. A major drop in credit scores due to retracting credit disputes can disqualify borrowers. Disputing derogatory credit on medical collections is exempt. Medical collection credit disputes are 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.
The three major credit reporting agencies,
All 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 credit dispute. 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 from the credit report.
Credit Disputes By Credit Repair Companies
Credit disputes are the most common method used by credit repair companies to remove derogatory items from 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 is because many times older credit disputes are harder to verify and/or have been sold to multiple collection companies.
Nothing is wrong with disputing bad credit. Keep in mind credit disputes that is a non-medical account with a balance greater than $1,000 that needs to be retracted during the mortgage process.
Reason Why Credit Disputes Are Not Allowed 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 instantly increases consumer credit scores. The reason for the increase in credit scores when consumers dispute is because the credit scoring formula takes the negative item from the scoring formula so the negative item is non-existent. The derogatory item still remains on the credit report and the verbiage on the credit report states that the consumer is disputing the tradeline.
Once the dispute has been resolved and the credit bureaus remove the verbiage two things happen:
- If the item in question is verified, the verbiage on the credit report states resolved and borrowers credit scores will drop
- The reason for the drop is because the negative factor is factored back in
- If the 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 the mortgage process is to dispute medical collections. Medical collections are exempt from credit disputes. Disputing medical collections is allowed by lenders with no lender overlays. Any credit disputes will automatically raise borrowers’ credit scores. If a borrower is short a few points in qualifying for a mortgage, borrowers can dispute medical collections and their scores will go up. Once the dispute is verified and resolved, the borrower’s credit scores will go back down.
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.
