FHA Mortgage Guidelines On Credit Disputes During Loan Process

This ARTICLE Is About FHA Mortgage Guidelines On Credit Disputes During Loan Process

In this article, we will discuss the FHA Mortgage Guidelines On Credit Disputes During Loan Process and how credit disputes can halt the mortgage process.

FHA Mortgage Guidelines On Credit Disputes During Loan Process requires the following:

  • All credit disputes that are non-medical collection accounts with outstanding balances (total outstanding aggregate outstanding balances of $2,000 or greater) of $1,000 or greater need to be retracted
  • Needs to be retracted prior to the mortgage application and approval process.
  • FHA is the most popular mortgage loan program in this country

FHA Loans Versus Other Loan Programs

FHA home loans have the most lenient and lax mortgage lending guidelines than any other mortgage loan program. FHA loans are excellent mortgage loans for first-time home buyers and home buyers with credit issues looking for a home loan with bad credit. FHA Loans benefit borrowers with higher debt-to-income ratios. HUD, the parent of FHA,  does not require borrowers to pay off outstanding collections and charged-off accounts in order to qualify for FHA loans. Home Buyers can qualify for FHA loans without having to pay off outstanding collection accounts with balances and charge off accounts without having to settle with them. However, FHA Mortgage Guidelines On Credit Disputes during mortgage application and mortgage approval process defines rules and regulations with regards to credit disputes.

FHA Mortgage Guidelines On Credit Disputes That Are Exempt

FHA Mortgage Guidelines On Credit Disputes exempt certain types of credit disputes. Borrowers can have credit disputes on medical collection accounts with outstanding balances. Mortgage borrowers can also have credit disputes on non-medical collection accounts that have zero balances. HUD allows credit disputes on all non-medical collection account credit disputes that have aggregate outstanding collection balances of under $1,000. As long as the total outstanding balances on the credit report do not exceed $1,000, then borrowers are allowed to have credit disputes on non-medical outstanding collection balances without having them be retracted. HUD exempts medical collections and charged-off accounts to be excluded from debt to income calculations. However, borrowers cannot have any credit disputes on charge-off accounts. All credit disputes on charge-off accounts need to be removed in order for the mortgage process to proceed. Credit Disputes on charged-off accounts are not allowed.

FHA Guidelines On Credit Disputes On Medical Collections

As mentioned earlier, FHA does not require outstanding collection accounts to be paid off. Medical collection accounts and charge-off accounts are exempt from debt to income calculations. For borrowers with more than $2,000 of outstanding non-medical collection account balances on the credit report, FHA requires 5% of the outstanding collection balances to be used in debt-to-income calculations. This is a hypothetical monthly payment and borrowers do not have to pay anything every month. But they require mortgage underwriters to take 5% of the unpaid outstanding collection balance on non-medical collection accounts as a monthly paper debt. This will be used in debt-to-income ratio calculations. Outstanding medical collections are exempt from this 5% rule no matter how large the outstanding balance.

Review Credit Disputes Prior To Pre-ApprovalReview Credit Disputes Prior To Pre-Approval

This message is mainly to mortgage loan originators who issue pre-approval letters to home buyers. I have seen so many home buyers who were issued pre-approval letters by loan officers without the loan officer reviewing the borrower’s credit report. The pre-approval phase is the most important stage of the mortgage loan application process.

 A loan originator who issues a pre-approval letter without thoroughly reviewing the borrower’s following information:

  • thoroughly reviewing borrowers credit reports and itemize every collection, charge offs, late payments
  • make sure there are no credit disputes on non-medical collections, charged-off accounts, late payments
  • two years tax returns, two years W-2s
  • 30 days paycheck stubs
  • credit scores

Stress During Mortgage Process & Last Minute Loan Denial

Loan Officers who issued pre-approval letters without thoroughly reviewing borrowers for pending credit disputes on credit reports can create a lot of havoc to not just the home buyers but the home sellers and everyone involved in the mortgage process. Unfortunately, there are many loan originators who only take the borrower’s word on their income and pull credit. They just look at the borrower’s credit score to see if they meet the minimum credit score requirements to qualify for a home loan  However, loan officers need to carefully examine the borrower’s credit reports. They need to see if there are any credit disputes and there are no errors on the credit report. If there are credit disputes that need to be retracted. They need to get this done prior to issuing a pre-approval letter.

Dangers Of Retracting Credit Disputes

Many loan officers just issue pre-approval letters and think that it will be alright for them to start the credit dispute retraction process at a later date after the home buyer gets an executed real estate purchase contract. This is the worst mistake loan officers can ever make. One thing loan officers need to realize is that once a consumer retracts a credit dispute, their credit scores will drop.

So, for example, here is a case scenario:

  • if a borrower was issued a pre-approval letter with a 580 credit score
  • has credit disputes on his or her credit report
  • retracting those credit disputes will drop their credit scores
  • will most likely drop it below 580 credit scores

This drop under 580 will no longer qualify borrowers on 3.5% down payment FHA Home Purchase Loans: HUD minimum credit score requirements to qualify for a 3.5% down payment home purchase FHA Loan is 580. The borrower will not qualify for a 3.5% down payment FHA Loan if the credit scores drop below 580. HUD requires borrowers with under 580 FICO and down to a 500 credit score to put a 10% down payment versus a 3.5% down payment.

I get calls by borrowers all the time because they are upset with their loan originators who got them pre-approved and got an executed real estate purchase contract and now no longer qualify.

How Credit Disputes Can Be Exempt From RetractionFHA Mortgage Guidelines On Credit Disputes That Are Exempt

There is a trick of the trade that credit disputes do not have to be retracted on late payments and derogatory credit tradelines. If a consumer has a credit dispute on any credit tradelines that have under $1,000 credit balance, it is exempt from retractions. For example, if a consumer has a credit dispute on a $2,000 balance credit card, they can pay down the balance to under $1,000 and not retract the dispute. Same with collections. If the balance of a collection account balance is $1,100, paying it down to $999 will exempt borrowers from retracting that dispute.

Reasons Credit Disputes Not Allowed During Mortgage Process

Many wonder why credit disputes are not allowed during the mortgage application process. The reason is that a credit dispute on a tradeline automatically triggers the three credit bureaus to exempt the disputed tradeline from the credit scoring formula. A disputed account will have the verbiage “Consumer Disputes: Not Resolved” on the credit report. The verbiage will trigger the credit bureaus to temporarily deduct the negative score from the overall credit scores of the consumer. What this means is the consumer credit scores will increase because the negative score is non-existent. The credit scoring model will negate the disputed credit tradelines from the credit scoring formula. This is the exact reason why credit disputes are not allowed during the mortgage process.

On the flipside, medical collection disputes are exempt. Disputing medical collection accounts is allowed and will increase consumer credit scores. Loan Officers can use this trick of disputing medical collections to try to increase borrower’s credit scores. Please, note that once disputes are removed, credit scores will drop.

Looking For Lender With No Overlays On FHA Loans?

If the mortgage loan officer made a mistake and issued a pre-approval letter with credit disputes and now no longer qualify because credit disputes retraction lowered credit scores, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] Gustan Cho Associates Mortgage Group is a mortgage company licensed in multiple states with no lender overlays on FHA, VA, USDA, and Conventional Loans. All of our pre-approvals are fully underwritten and signed off by our mortgage underwriters. All of our pre-approvals close 100% because they are full credit approvals. Our licensed and support staff at GCA Mortgage Group is available 7 days a week, evenings, weekends, and holidays to answer all of your questions.

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