FHA Medical Credit Dispute Guidelines And How It Can Raise Credit Scores
This BLOG On FHA Medical Credit Dispute Guidelines And How It Can Raise Credit Scores Was PUBLISHED On June 1st, 2020
One part of mortgage lending and credit reports that can really slow up the process is credit disputes.
- They are very strict guidelines on credit disputes
- Credit disputes are not allowed during the mortgage process
- There are certain exemptions where disputes are allowed
- Per FHA Medical Credit Dispute Guidelines, medical collections are exempt from disputes
- Typically, a mortgage loan cannot close while there are active disputes
- There are a few disputes the do not adhere to this rule
- FHA Medical Credit Disputes Guidelines state medical collections currently in dispute are exempt
- Non-medical disputed accounts whose total balance is under $1,000 are exempt from retraction
- Please see HUD GUIDELINES for credit disputes
In this article, we will discuss and cover FHA Medical Credit Dispute Guidelines And How It Can Raise Credit Scores.
Reason Why Credit Disputes Are Prohibited During Mortgage Process
Whenever a consumer disputes a derogatory tradeline which includes collections, the three credit reporting agencies automatically discounts the negative factor from the consumer credit scoring formula.
For example, let’s take a case scenario where a $300 medical collection account just posted on a consumer credit report:
- A recent collection account that hits consumer credit report can drop credit scores by 50 points or more
- If consumer credit scores were 620, a recent $300 medical collection account will easily drop this consumer’s credit scores down to 570
- If the consumer decides to do a credit dispute on the $300 medical collection account, the credit bureaus will automatically discount the 50 point drop and raise the consumer credit scores back to 620
- Medical Collection will remain on the credit report
- However, the negative factor is negated and the credit scoring formula will not factor the collection account
- Once creditor validates the medical collection account, the 50 points negative factor will be factored back to consumer credit scores
- If consumer retracts the credit disputes, the credit bureaus will add the negative 50 point factor back to consumer credit scoring formula
- Retracting credit disputes will lower consumer credit scores
- Disputing collections and derogatory tradelines will increase consumer credit score
The above reasons are why credit disputes are not allowed during the mortgage process. Medical Disputes are exempt. Zero balance non-medical collections are also exempt. Aggregate non-medical collections with under $1,000 balances are exempt.
Creative Tools To Utilize FHA Medical Credit Dispute Guidelines
There are creative ways to utilize FHA Medical Credit Dispute Guidelines in raising credit scores to qualify homebuyers for FHA Loans. In this blog, we will examine a recent case study on how utilizing FHA Medical Credit Dispute Guidelines and disputing an account helped get an FHA loan closed. While reading this please pay attention to detail of the chain of events.
Here is a recent case scenario on a borrower where Mike Gracz of Gustan Cho Associates utilized and benefited raising credit scores by using FHA Medical Credit Dispute Guidelines:
- This is because the rule of thumb in the mortgage industry is; disputed accounts are bad!
- The client in this particular case study will be named Blake Clements (not real name)
- Blake came to Gustan Cho Associates Mortgage Group after being denied a mortgage loan with his current lender
- He was denied an FHA loan due to disputed accounts
- At the start of the process with lender number one, Blake had a 622 credit score
- He DID HAVE disputed accounts on his report
- They did total over $1,000 and multiple disputed accounts were NON- MEDICAL
- The loan officer at lender number one instructed Blake to remove ALL disputed accounts
- Blake did as he was told and went through the complicated process of removing disputes
- Please see this informative blog about REMOVING DISPUTES by Gustan Cho for those instructions
While Blake was removing disputes, lender number one went forward and ordered the appraisal on the home.
Negative Impact On Removing Credit Disputes
After 72 hours, all disputes were removed with all three credit bureaus. Lender number one re-pulled Blake’s credit report.
- His scores went down
- His middle score became a 577
- 3 points away from qualifying for 3.5% down payment FHA mortgage
- Blake, like most clients, did not have 10% do put down for an FHA loan with sub 580 credit scores
This is when Blake found the Gustan Cho Associates.
How MIke Gracz Raised Borrowers Credit Scores To Qualify
We were able to assist Blake and here is how we did it.
- We verified his credit (within the 30-day window) and we pulled the same 577 score
- Blake explained to us that he was a 622 score a few weeks ago
- After discussing what had changed between then and now, we concluded it was from the removal of the disputes
- It is very common borrowers score will drop when disputed accounts are removed with the credit bureaus
- We asked borrower which accounts were disputed and he told us
- Two of the accounts that he removed disputes on were MEDICAL COLLECTIONS
- Remember, medical collections are exempt from credit disputes per FHA Medical Dispute Guidelines
- We instructed Blake to “re-dispute” the two medical collections
- He did, we did a RAPID RESCORE on his credit report, see WHAT IS A RAPID RESCORE for details
- After 48 hours, the rapid rescore came back to us and Blake was now a 584 credit score
- He now qualified for a 3.5% down payment FHA mortgage
Since lender number one issued an FHA case number to the property and ordered the appraisal, we were able to transfer that to us and close his loan in only 3 weeks, without extending his contract date.
FHA Medical Credit Dispute Guidelines Versus Lender Overlays
Lender number one could not use this tactic as they had a lender overlay with disputed accounts.
- This is a very common lender overlay
- Many lenders do require ALL disputed accounts be removed from the credit report before closing on the loan, EVEN MEDICAL COLLECTIONS
- Here is more information on LENDER OVERLAYS
- Since we are direct lenders with no overlays at Gustan Cho Associates Mortgage Group at Loan Cabin Inc., we are able to approve more loans than most companies!
- Over 75% of our clients have been issued a denial from their current lender or borrowers do not qualify with another lender due to their lender overlays
- Those who come to us first, get a full underwriting approval before submitting an offer on a home
- This is our TBD underwriting process
- We close 100% of all of our pre-approvals because all of our pre-approvals are loan commitment to lend that has been underwritten and signed off by our mortgage underwriters
Please reach out to Mike Gracz of Gustan Cho Associates Mortgage Group at 262-716-8151 or text for a faster response. Or email us at [email protected] Again, all our pre-approvals are TBD PROPERTY UNDERWRITING full loan commitments. This will take all the headaches out of the mortgage process. We are available 7 days a week, evenings, weekends, and holidays.