How Credit Disputes Affect Mortgage Process

How Credit Disputes Affect Mortgage Process

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this article, we will cover and discuss how credit disputes affect mortgage process and cause loan denial. The pre-approval stage of the mortgage process is the most important part of the overall mortgage loan process. Credit disputes are not allowed on FHA loans during the mortgage process unless the credit disputes are exempt, says John Parker, of Gustan Cho Associates:

The first reason for last-minute loan denials or stress during the loan process is that the loan officer did not properly qualify the borrower. You cannot have non-medical credit disputes during the mortgage process on FHA loans.

Most lenders will require all credit disputes to be removed on government and conventional loans. Unfortunately, many loan officers will qualify for income and run credit, and if the borrower qualifies with the minimum credit score, they issue a mortgage pre-approval letter. With the pre-approval letter, home buyers enter into real estate purchase contracts and go through the mortgage process. In the following sections, we will cover how credit disputes affect mortgage process.

How Loan Officers Can Cause Stress During The Mortgage Process

Experience is the key for loan officers. Every loan officer starts without experience when they enter the business. However, a mentor or manager should closely monitor a new loan officer. Loan officers have huge responsibilities for their homebuyers and their whole families. A loan officer should never issue a homebuyer a pre-approval with credit disputes. Credit dispute removal is one of the main causes of a last-minute mortgage denial. Click here to get stress free mortgage loan with us.

How Families Get Affected By The Deeds of Incompetent Loan Officers

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Borrowers trust their loan officers and start packing and buying new furniture. Many borrowers even enroll their children in the new school where they buy their homes. 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 drop a few points but can substantially plummet.

Damage of Credit Repair When Applying For a Mortgage?

Credit repair can do more damage than good when applying for a mortgage. Why do credit repair? You cannot qualify for a mortgage during the process unless you are exempt and have medical collections. You can have credit disputes on non-medical collections with zero balance.

Collection accounts do not have to be removed if the total aggregate sum of all accounts has less than a balance of $1,000. All collection and derogatory credit tradelines two years or older must not be removed. Many folks with prior bad credit try repairing their credit reports by disputing derogatory credit items to the three credit reporting agencies;

Why Removing Credit Disputes Drop Scores of Borrowers?

Disputing erroneous items during the mortgage process is fine if borrowers have proof that the credit bureaus are reporting errors. Suppose a borrower has documentation of the error. Removing credit disputes can drop borrowers’ credit scores substantially depending on the recent derogatory credit tradeline being disputed, says Alex Carlucci of Gustan Cho Associates.

In that case, the loan officer can do a rapid rescore where it only takes three to five business days to update the borrower’s 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.

How Credit Bureaus Report Disputes on Consumer Credit Reports

Consumer files credit dispute on a valid derogatory credit item without verifying 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 a consumer retracts a credit dispute, the credit bureaus will factor the negative item back into the credit scoring model, and this will cause a drop in credit scores. The drop in credit scores can disqualify the borrower from loan approval. The amount of the credit score drop depends on the type of derogatory credit item and how recent the bad credit item is. Click here to apply for low credit score loan

Credit Tradelines Exempt From Credit Disputes

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

How Credit Repair Companies Delete Derogatory Items

The consumer can do a credit dispute and challenge that the creditor verifies the 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 with verification to the credit reporting agencies.

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 from the consumer’s credit reports.

This is the typical way credit repair works, and thousands, if not millions, of consumers, use this technique to delete derogatory items. Credit repair companies use this technique over and over. If the creditor does verify the three credit reporting agencies, credit repair companies use other letters contesting the validity of the derogatory items.

How Credit Disputes Affect Mortgage Process and Backfire on Borrowers

Credit disputes can backfire on mortgage loan applicants. There are times when creditors will not just give you a hard time in removing the credit disputes but will not remove disputes. This holds true even if you have asked them too many times.  Fannie Mae, Freddie Mac, VA, and USDA, does not require credit disputes to be removed from the credit report during the mortgage process. It is up to the automated underwriting system findings. The AUS will state whether or not to remove credit disputes if needed. HUD guidelines do not allow credit disputes on derogatory information with credit balances. For borrowers with active credit disputes and disputing derogatory items with credit balances on credit reports, their mortgage loan application will be suspended until the credit dispute is retracted.

How Scores Drop From Removing Disputes

If the borrower has credit disputes on items with a credit balance, the creditor can choose not to have the dispute retracted. If so, the consumer must 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 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. Talk to our expert to get a loan

Are Older Credit Disputes Exempt from Needing To Be Removed?

Older derogatory credit tradelines at least 24 months old or older must not be removed. The reason is derogatory credit tradelines older than 24 months old have little to no impact on credit scores.

Potential homebuyers solicited by a credit repair company, please be advised that credit repair during the mortgage process can be more damaging than good.

Credit disputes 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.

Pre-Approvals Issued With Credit Disputes 

Loan officers should never issue a pre-approval letter if the borrower has credit disputes on derogatory credit tradelines, except for non-exempt credit disputes. All pre-approval letters with outstanding non-exempt credit disputes are null and void. A loan officer issuing a pre-approval letter with outstanding non-exempt and non-medical credit disputes is asking for stress for himself and the borrowers during the mortgage process.

How Credit Scores Impact Mortgage Process

Retracting Credit Disputes will backfire when applying for a mortgage loan during the mortgage process. Credit disputes are not allowed because when consumers dispute a derogatory credit tradeline, the disputed item is taken off the credit scoring model. Therefore, the derogatory credit tradeline is negated when the credit scoring model reads the credit disputes and the credit scores go up. Then when the credit disputes are removed, the derogatory credit item is factored back into the credit scoring formula, and the consumer credit scores will drop.

How Removing Credit Disputes Disqualify Borrowers

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. There are exempt credit disputes where it does not need to be removed.

Non-medical collections do not have to be removed, no matter how large the outstanding balance is. Zero balance non-medical collection accounts are exempt from retraction.

If the total aggregate outstanding balance of all of your creditors is less than $1,000, it does not have to be removed. Credit disputes on non-medical collections 24 months or older are exempt from retraction. Any credit disputes at least 24 months old or older are exempt from the dispute being removed.

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Gustan Cho Associates Mortgage is a national mortgage company licensed in multiple states with no overlays on government and conventional loans. Borrowers who need to know how credit disputes affect the mortgage process and need an expert to help them qualify for a mortgage, please contact us at Gustan Cho Associates at or 800-900-8569. Text us for a faster response. The team at Gustan Cho Associates is licensed in multiple states and has no lender overlays on government and conventional loans. We can advise you on how credit disputes affect the mortgage process. The team at Gustan Cho Associates is available seven days a week, on evenings, weekends, and holidays.

This BLOG On How Credit Disputes Affect Mortgage Process Was UPDATED on February 5th, 2024

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