How Credit Disputes Affect Mortgage Process And Cause Loan Denial

How Credit Disputes Affect Mortgage Process And Cause Loan Denial

This BLOG On How Credit Disputes Affect Mortgage Process And Cause Loan Denial Was UPDATED On November 25th, 2017

The pre-approval stage of the mortgage process is the most important part in the overall mortgage loan process.

  • The number one reason for last minute loan denials or stress during the loan process is because the loan officer did not properly qualify the borrower
  • Unfortunately, many loan officers will qualify income, run credit, and if the borrower qualifies with the minimum credit score, they issue a mortgage pre-approval letter
  • With the pre-approval letter on hand, home buyers enter into real estate purchase contracts and go through the mortgage process
  • Borrowers trust their loan officers and start packing, buying new furniture, and even enroll their children to the new school where they are buying their home
  • The Loan Officer then submits the loan application to processing and underwriting for a mortgage loan approval
  • The mortgage underwriter then notices credit disputes on the borrower’s credit reports and suspends the file due to credit disputes
  • Credit Disputes are prohibited during mortgage process
  • The dangers of credit disputes is that once the borrower retracts credit disputes, their credit scores will not only just drop a few points but can substantially plummet

Credit Repair To Qualify For Mortgage

Many folks with prior bad credit try repairing their credit reports by disputing derogatory credit items to the three credit reporting agencies;

Why Can Credit Disputes Drop Credit Scores Of Borrower?

Disputing erroneous items during mortgage process is fine if borrowers have proof that the credit bureaus are reporting errors.

  • If borrower has documentation of the error, the loan officer can do a rapid rescore where it only takes three to five business days to update the borrowers credit report
  • But many consumers dispute derogatory credit items that are correct with no documentation hoping the creditor will not validate the derogatory item and the credit bureaus will delete them
  • For example, say a consumer has did not pay an old credit card account and there is an unpaid credit balance of $2,300.00
  • Consumer files credit dispute on a valid derogatory credit item with no validation that it is an error
  • Credit Bureaus will state ” Consumer Disputes This Credit Item”
  • This verbiage will automatically trigger the credit bureaus to take the negative item from their credit scoring model even though the negative item will remain along with the verbiage
  • Consumer credit scores will increase
  • When consumer retracts credit dispute, then the credit bureaus will factor the negative item back to the credit scoring model and this will cause a drop in credit scores
  • The drop in credit scores can disqualify the borrower from a loan approval
  • The amount of the credit score drop depends on the type of derogatory credit item it is and how recent the bad credit item is

Here Are Negative Items That Are Exempt From Disputing

Mortgage Borrowers cannot have disputes on the following items:

  • Non-Medical Collections
  • Late Payments
  • Charge Off Accounts
  • Judgments 
  • Tax Liens

Borrowers Are Allowed To Dispute The Following:

  • Medical Collections
  • Zero Balance Non-Medical Collections
  • Non-Medical Collections With Aggregate Outstanding Balances Under $1,000

Credit Dispute To Delete Derogatory Items

The consumer can do a credit dispute and challenge that the creditor verify that derogatory item is legitimate.

  • This is done by the consumer writing a credit dispute letter to the three credit reporting agencies stating that the derogatory item is not theirs and requesting the creditor to remove the credit dispute
  • The creditor has 30 days to respond to the credit reporting agencies with verification
  • If the creditor does not respond to the the three credit bureaus within the 30 days allowed, the three credit reporting agencies must remove the derogatory item off the consumer’s credit reports
  • This is the typical way on how credit repair works and thousands, if not millions, of consumers use this technique in trying to delete the derogatory items
  • Credit repair companies use this technique over and over
  • If the creditor does verify to the three credit reporting agencies, credit repair companies use other letters contesting the validity of the derogatory items

Credit Dispute Can Backfire

Credit disputes can backfire on mortgage loan applicant.

  • Fannie Mae, Freddie Mac, VA, USDA, FHA guidelines do not allow credit disputes on derogatory information that has credit balances
  • Mortgage loan borrowers who have active credit disputes and who are currently disputing derogatory items with credit balances on credit report their mortgage loan application will be suspended until the credit dispute is retracted
  • If the mortgage loan borrower has credit disputes on items with a credit balance, the creditor can choose not to have the dispute retracted
  • If that is the case, the consumer will need to pay off the credit balance
  • If the credit dispute is retracted the mortgage loan borrower’s credit scores will drop and can drop substantially
  • I had a recent case where one of my clients had the credit dispute retracted but the outcome was that her credit scores dropped by 80 plus points
  • This drop totally disqualified her for a mortgage loan and I needed to drop her off the mortgage loan application and use just her husband with a non-occupied co-borrower

Older Derogatory Items And How Credit Disputes Affect Mortgage Process

How Credit Disputes Affect Mortgage Process:

Potential home buyers who get solicited by a credit repair company please be advised that credit repair during mortgage process can be more damaging than good. How Credit Disputes Affect Mortgage Process can be devastating.

  • DO NOT dispute derogatory items with a credit balance on non-medical collections
  • This tactic can be detrimental to credit scores when applying for home loans
  • Retracting Credit Disputes will definitely backfire when applying for a mortgage loan and during mortgage process
  • The older the derogatory item is, the less impact it will have on credit scores
  • Any derogatory item older than two plus years will have little or no impact on credit scores

The Gustan Cho Team at USA Mortgage are direct lenders with no lender overlays on government and conventional loans. Borrowers with credit or high debt to income ratios needing to qualify for a home mortgage, please contact The Gustan Cho Team at 262-716-8151 or email us at gcho@usa-mortgage.com. We are licensed in multiple states and are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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