FHA Loans With Credit Disputes During Mortgage Process

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FHA Loans With Credit Disputes During Mortgage Process

This BLOG On FHA Loans With Credit Disputes During Mortgage Process Was UPDATED On July 16th, 2018

There are strict rules in qualifying for FHA Loans with credit disputes during the mortgage application and approval process.

  • Credit disputes is when a consumer will contest and dispute a derogatory credit item and/or tradeline from the credit report
  • Consumers dispute derogatory tradelines in hopes of getting it corrected and/or deleted off their credit report
  • For example, if John Doe has a charge off on Capital One Credit Card on his credit report:
    • and wants it deleted off his credit report
    • he can try to get it deleted off his credit report by disputing the Capital One Credit Card charge off to the three credit reporting agencies
    • need to state why he is disputing it
    • if John Doe has proof, provide proof to credit bureaus
    • if like many consumers John Doe just wants to dispute and state the derogatory is not his in hopes of the creditor not verifying the information, he can do so
    • credit bureaus will notify creditor of the credit dispute
    • creditor has 30 days to provide validity of dispute
    • if creditor does not respond, credit bureaus need to delete disputed item
    • If creditor responds back and validates, then the derogatory item stays on
  • Many consumers do credit repair or hire credit reporting companies to delete derogatory items off their credit reports
  • Credit repair does work in many cases
  • Collection accounts, late payments, charge offs, bankruptcies, foreclosures, and tax liens can be removed off a consumer’s credit report

Does Credit Repair Work?

There are thousands of credit repair companies in the United States.

  • Like many industries, there are reputable credit repair companies and there are less than reputable credit card companies
  • Credit repair does work but credit repair is not often necessary to qualify for mortgage
  • Anything a credit repair consultant can do, a consumer can do it themselves
  • However, if consumers are busy and cannot diligently devote their time in doing the credit repair themselves, hiring a reputable credit repair company may be wise
  • I have personally seen judgments, bankruptcies, foreclosures, charge offs, collection accounts, tax liens removed from consumer’s credit reports in a matter of a few months
  • I do not know how some of these credit repair companies do it, and I do not care to know but they can get derogatory credit items removed off the consumer’s credit reports

Credit Repair Is Waste Of Money For Many Borrowers

Consumers need to keep in mind that credit repair is not necessary to qualify for mortgage.

  • Often times, credit repair does more damage than good when people enroll in credit repair to qualify for mortgage
  • Deleting older derogatory credit tradelines does very little to improve credit scores
  • The older the derogatory tradeline is, the less impact it has on credit scores
  • Lenders do not often care about older collections and charged off accounts
  • Lenders do not care about older late payments
  • Lenders and the Automated Underwriting System normally cares about timely payments in the past 12 months
  • Instead of wasting money in credit repair on trying to delete older bad credit items, use that money to open up three to five secured credit cards with at least $500 credit limits

Secured credit cards is the easiest and fastest way of boosting credit scores and re-establishing credit.

FHA Loans With Credit Disputes On Medical Collections

Mortgage borrowers can qualify for FHA Loans with credit disputes on medical collection accounts.

  • FHA treats medical collections differently than non-medical collection accounts
  • Consumers can have as many credit disputes with uncollected collection balances and still qualify for FHA Loans With Credit Disputes on medical collections
  • Medical collections are exempt from credit disputes

FHA Loans With Credit Disputes On Non-Medical Collection Accounts And Charge Offs

Consumers can have credit disputes on non-medical collection accounts on zero balance collection balances.

  • FHA Loans With Credit Disputes will allow up to a maximum of $1,000 of unpaid collection account balances to have credit disputes
  • If the credit disputes on the total of the unpaid collection account balances exceed $1,000, consumers need to have the credit disputes retracted off credit report
  • If they cannot get those credit disputes retracted, then the file needs to be downgraded to a manual underwrite
  • Borrowers with charged off collection accounts need to have the credit disputes on the charge offs removed in order to proceed with mortgage application and approval process
  • Credit disputes on charged off accounts are not allowed during mortgage process

Credit Scores And Retracting Credit Disputes

When consumers retract credit disputes from the three credit reporting agencies, the chances are credit scores will drop.

  • Keep this in mind and be prepared to have a drop of credit scores prior to applying for a mortgage loan
  • Those with many credit disputes should consider retracting their credit disputes off their credit report before even considering purchasing a home or having a real estate purchase contract
  • Having credit scores drop will not be a permanent issue
  • Credit scores can rebound a few months after the credit disputes are retracted and removed off credit report

Loan Officers should never issue a pre-qualification and/or pre-approval letter to borrowers with outstanding credit disputes. Once credit disputes are retracted, there are many folks who will not qualify for mortgages due to the credit score drop. A substantial drop can occur and disqualify a mortgage applicant from qualifying for mortgage.

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