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 And PUBLISHED On December 16th, 2019

How Credit Disputes Affect Mortgage Process
Gustan Cho Associates

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
  • Many borrowers 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 the mortgage process
  • The dangers of credit disputes are 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

How to repair a loan to qualify for a 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?

Why Can Credit Disputes Drop Credit Scores Of Borrower?

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

  • If a 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

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

Which means a credit dispute to remove items that are subject to a derogation

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 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

Can a credit dispute lead to a reverse?

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
  • 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 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 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

What are older derogatory items and how do credit disputes affect the mortgage process

How Credit Disputes Affect Mortgage Process:

Potential homebuyers who get solicited by a credit repair company please be advised that credit repair during the 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 the 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

Credit disputes that are 24 months or older are exempt from retraction.

Qualifying For Mortgage With Direct Lender With No Overlays

How Qualifying For Mortgage With Direct Lender With No Overlays

Gustan Cho Associates Mortgage Group at Loan Cabin Inc. are direct lenders with no overlays on government and conventional loans. Borrowers with a credit or high debt to income ratios needing to qualify for a home mortgage, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at We are licensed in multiple states and are available 7 days a week, evenings, weekends, and holidays.

This BLOG On How Credit Disputes Affect Mortgage Process Was UPDATED On July 20tth, 2019

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