This guide covers mortgage approval without retracting credit disputes. HUD, the parent of FHA, does not allow credit disputes on derogatory credit tradelines such as late payments, charge-offs, bankruptcy, foreclosure, short sale, repossessions, and non-medical collections. Dale Elenteny, a senior loan officer at Gustan Cho Associates, explains about getting mortgage approval without retracting credit disputes as follows:
There are exemptions for mortgage approval without retracting credit disputes. Non-medical disputes, zero balance non-medical collection accounts, and credit disputes that are under $1,000 balance can get mortgage approval without retracting credit disputes.
There are exemptions on credit disputes not needing to be removed, such as medical collections, non-medical collections with zero balances, and credit disputes on non-medical collections with aggregate balances less than $1,000. You do not have to retract credit disputes on other loan programs. This blog applies straight to FHA mortgage approval without retracting credit disputes. In the following paragraphs, we will discuss mortgage approval without retracting credit disputes.
Why HUD Does Not Allow Credit Disputes During The Mortgage Process
Mortgage approval without retracting credit disputes is possible under certain circumstances. This blog will show viewers how to get mortgage approval without retracting credit disputes. More and more people are disputing their credit today. Consumers with bad credit or derogatory credit tradelines hire credit repair companies to clean their credit. By doing so, multiple disputes show up.
Many consumers are disputing derogatory credit themselves in hopes of getting the derogatory tradelines deleted or corrected. What a dispute on your credit does is hide the negative reporting of that tradeline which falsely improves your credit score immediately. For example, if a consumer disputes a recent 30-day late payment, all credit bureaus automatically negate the derogatory tradeline from its credit scoring formula.
The credit dispute triggers the scoring model like it does not exist. Due to this, consumer credit scores automatically increase when a credit dispute is posted. Conversely, when consumers retract disputes, the credit scoring model triggers that derogatory item back to the credit scoring model. This triggers a recent negative tradeline and results in credit scores dropping.
Credit Disputes Halts Mortgage Process on FHA Loans
Disputing accounts can help you in removing negative credit. However, disputes can hinder the underwriting process if the dispute is not removed. Mortgage Underwriters will make borrowers remove disputes on any derogatory account in the last 24 months on a cumulative balance of over $1,000. So if the borrower has a credit card with a $500 balance disputed and another with a $700 balance disputed, the mortgage underwriter will HALT the mortgage process until the disputes are retracted. Retracting the dispute, it will immediately drop the borrower’s score. It may prevent borrowers from getting approve/eligible on an automated underwriting system. If you give us a call, we can help you maximize your score by keeping disputes on enhancing your score without the underwriter making you remove them.
Mortgage Guidelines On Credit Disputes
There are circumstances where borrowers can get mortgage approval without retracting credit disputes. Here are general credit dispute mortgage guidelines:
- Medical credit disputes are exempt
- Non-medical collections with zero outstanding balance are exempt from retracting disputes.
- Non-medical disputes with an aggregate total of $1,000 in outstanding balance are exempt from retracting disputes.
- Cannot have credit disputes on derogatory credit tradelines such as late payments and charged-off accounts.
We will discuss ways of getting mortgage approval without retracting credit disputes in the following paragraphs.
How Lender Can Help For a Mortgage Approval Without Retracting Credit Disputes
Let’s take a case scenario where a consumer is disputing a credit card account with a recent 30-day late payment. The credit card limit is $3,000, and the outstanding balance is $2,000. The recent 30-day late payment plummeted consumer credit scores by 80 points, whereas the consumer’s credit score is now 500. By disputing the derogatory tradeline, the consumer credit scores will go back up to 580 because the credit bureaus will negate the late payment while the consumer is disputing it. FHA requires a minimum credit score 580 to qualify for a 3.5% down payment home purchase.
The Underwriter WILL require that the credit dispute be retracted for the mortgage process to proceed. However, if the borrower retracts the credit dispute, credit scores will drop back to 500 FICO credit scores. Here is the solution. Mortgage Approval Without Retracting Credit Disputes is allowed if the outstanding collection balance is under $1,000 from all creditors.
The $2,000 outstanding collection account balance must be paid to under $1,000. If the late payment credit card outstanding balance is paid under $1,000, the borrower DOES NOT need to retract the credit dispute. Any credit disputes on non-medical collections with zero balance are exempt from credit disputes. Zero balance derogatory credit tradelines do not have to be removed during the mortgage process.. You can get mortgage approval without retracting credit disputes older than 24 months from the date of the last activity (DLA) are exempt from credit disputes. Older credit disputes on outstanding collection accounts or derogatory credit tradelines over two years old must not be removed.
Mortgage Approval Without Retracting Credit Disputes Is Paying Down Balance Under $1,000
What borrowers need to do is pay down all accounts that are late in the last 24 months down to a total balance of $999. Then you can maximize the score and prevent the disputes from being removed. Consumers also could do the same in reverse. Another option for disputes on accounts greater than $1,000 cumulative is to accept that the file will be a manual underwrite. A manual underwrite is a bit more stringent.
Normal FHA debt-to-income ratio allows for a 46.9% front-end and 56.9% back-end DTI. Manual underwrite has three tiers of back-end ratios. A 50 debt-to-income ratio is the ratio that manually underwrites one. This requires the client to have 2 of the following compensating factors.
Let’s say you have a credit card with a balance of $600 that is late in the last 12 months, dropping your score down to 570. Dispute this account and watch your score go up to 600. Now you may receive an approve/eligible and only have to put a 3.5% down payment vs keeping the 570 scores and being downgraded to manual underwrite and requiring you to put 10% down and fit into the manual underwriting guidelines, which are more stringent.
Manual Underwriting For Mortgage Approval Without Retracting Credit Disputes
VA and FHA loans allow manual underwriting. Another option borrowers with credit disputes have is to leave credit disputes alone and get it downgraded to a manual underwrite. However, the Manual Underwriting Guidelines need to be met. Some manual underwriting requirements include timely payments in the past 12 months, one month’s reserves (P.I.T.I.), and verification of rent.
Three months of total payment in the bank after you close, meaning after you pay for the down payment and closing cost. There is no shock from current housing payment via rent or mortgage payment ( over a 5% increase is considered payment shock). High residual income. This is for your Mortgage Banker to figure out.
Basically it means you have money to pay all other debts not considered, like cell phone, electricity, food, gas, etc, etc. Manual underwriting prevents late payments in the last 12 months, even if disputed. Manual Underwriting also requires verification of rent. If you fit these parameters, then disputes can be left on. In closing, do not look at your credit and see a 500 score, then hire a credit repair company to dispute your negative tradelines, and then see your score jump to a 640 and think you are ready. The above rules should help guide you through this misconception.
Qualifying For A Mortgage With A Lender With No Lender Overlays
Borrowers with credit disputes and marginal credit scores who need to qualify for a mortgage, please get in touch with us at Gustan Cho Associates Mortgage Group. We are a national mortgage company with no overlays on government and conventional loans licensed in multiple states. Over 80% of our borrowers are folks who could not qualify at other lenders due to those lenders having overlays. We are available evenings, weekends, and holidays seven days a week. Call or text us for a faster response at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.
