Updated Credit Dispute Guidelines During Mortgage Process


This BLOG On Updated Credit Dispute Guidelines During Mortgage Process Was PUBLISHED On March 17th, 2019

There are updated credit dispute guidelines in the mortgage process we will cover in this blog.

  • In general, lenders prohibit credit disputes during mortgage process
  • The best way to understand why is to go over what impact credit disputes has on credit scores
  • There are some credit disputes that are exempt from retraction
  • Exempt credit disputes are exempt via agency guidelines per FHA, VA, USDA, Fannie Mae, Freddie Mac
  • If an agency guideline exempts disputes, the individual lender can override agency guidelines and require borrowers to remove all disputes including exempt disputes
  • This stricter lending requirement by lenders is called overlays
  • Most lenders have mortgage overlays on credit disputes and other guidelines
  • However, Gustan Cho Associates at Loan Cabin Inc. are national direct lenders with no overlays on government and conventional loans

We will cover updated credit dispute guidelines and exempt disputes.

How Credit Dispute Process Works

Credit Repair Companies work the credit dispute program to delete derogatory credit tradelines.

  • Whether it is accurate or not, credit repair companies charge a lot of money to remove negative items from credit reports
  • The way it is done is by disputing the creditor that is reporting the negative tradeline
  • They will send certified mails contesting that the negative item is not theirs
  • The credit bureaus will then notify the creditor of the dispute
  • The creditor has 30 days to respond
  • If the creditor does not respond, the credit bureaus are supposed to delete the disputed item
  • This seems like a simple process
  • It is supposed to work
  • However, it does not always work
  • Disputed credit tradelines can stay on indefinitely
  • This holds true even when consumers retract it
  • Many homebuyers’ mortgage process has been in a standstill because creditors did not remove the disputed credit tradelines

We will go over how credit disputes impact the mortgage process in the following paragraph.

How Credit Disputes Affect Credit Scoring Model

When consumers disputes a derogatory credit tradeline, the credit bureaus automatically discount the negative impact of that particular credit tradeline from the credit scoring formula.

  • What this means is if a consumer were to dispute a recent collection account, that collection account is discounted
  • It is like the collection account does not exist
  • The data still reports on the credit bureaus but the verbiage “consumer disputes this for accuracy” automatically triggers an instant credit score increase
  • Whenever a consumer disputes a negative credit tradeline, their credit scores increases
  • When a consumer retracts a credit dispute, the negative credit factor is factored back into the credit scoring formula

This is the exact reason why credit disputes are not permitted prior to and during mortgage underwriting process.

Derogatory Credit Tradelines Exempt From Retracting Credit Disputes

There are certain instances where credit disputes do not have to be removed. There are two types of collection accounts. 

  • Medical collections
  • NON-Medical Collections

Medical collection credit disputes do not have to be removed no matter what the outstanding balance is. NON-Medical collection credit disputes with zero outstanding balances do not have to be removed. Non-medical collection credit disputes that the aggregate total is less than $1,000 does not have to be removed. All other credit disputes need to be removed.

Updated Credit Dispute Guidelines On Derogatory Tradelines Older Than 24 Months

All non-medical collection credit disputes on accounts that are older than 24 months is exempt from removing credit disputes. The Date Of Last Activity (DLA) needs to be at least 24 months old or older. There are times when credit bureaus will not remove credit disputes when consumers request them. Credit disputes may remain on credit reports and lenders can proceed with processing and underwriting a mortgage ONLY if it is downgraded to manual underwriting. VA and FHA Loans are the only two loan programs that allow manual underwriting.

Mortgage Lender Overlays Versus Agency Guidelines

Some lenders will require borrowers to remove all credit disputes, regardless of medical and/or non-medical. They do not care about the exemption rules. Lenders are allowed to have additional lending requirements and guidelines on top of minimum agency guidelines. This is called lender overlays. Borrowers who run into a situation where their lender has overlays, please contact us at Gustan Cho Associates at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are direct lenders with no overlays on government and conventional loans. We are also experts on non-qm and bank statement loan for self-employed borrowers.

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