Credit Disputes During The Mortgage Process
This guide covers credit disputes during the mortgage process. Credit bureaus do make mistakes on consumer credit bureaus. Creditors often make errors. Many residential and commercial mortgage lenders will not allow credit disputes during the mortgage process:
Credit disputes normally increase consumer credit scores. When there is a verbiage on the credit report that consumers disagrees and tradeline in dispute, the credit bureaus will automatically take the derogatory credit tradeline from the credit scoring algorithm.
Consumers need to check their credit reports periodically and make sure creditors are reporting their credit payment history correctly. Consumers may file a credit dispute on incorrect credit tradelines. If the creditors do not have proof the credit dispute has no merit, the credit bureaus need to remove it.
How Does Credit Disputes Work?
Consumers have the right to dispute errors by creditors that has been reported, It is illegal for creditors to report errors of consumer credit profiles. Mortgage lenders assist clients maximize credit scores so they can qualify for a mortgage with the best rates.
Errors on consumer credit reports can cause a borrower not eligible for a mortgage. A late payment can plummet credit scores where it can cause higher mortgage rates. Many lenders will require credit disputes during the mortgage process to be removed.
HUD guidelines on FHA loans require all non-medical credit disputes to be removed during the mortgage process with certain exceptions. You cannot have disputed charge-off accounts, disputed non-medical collection accounts, and credit disputes on any derogatory credit tradelines.
How Does Credit Disputes Affect The Mortgage Process
If a consumer has a cumulative total outstanding balance of all disputed derogatory accounts that is greater than $1,000, their file must be downgraded to a manual underwrite. What this means in terms to the every day consumer is this. Lenders utilize automated desktop underwriting (AUS), once a complete file is presented AUS can determine if the file can be approved or any conditions to close the loan.
Automated Versus Manual Underwriting
Lenders prefer to be able to use AUS, for not only the sake of time to reach closing but also when using Manual Underwriting the allowable debt-income ratio drops significantly. To qualify for manual underwriting, borrowers need to have timely payments for the past 24 months on FHA loans.
The maximum front-end debt-to-income ratio cannot exceed 46.9% front-end and 56.9% back-end to get an automated underwriting system approval on FHA loans. The maximum debt-to-income ratio on manual underwrites are lower.
HUD, the parent of FHA, require a maximum 31% front-end and 43% back-end debt-to-income ratio on manual underwriting with no compensating factors, 37% front-end and 47% back-end debt-to-income ratio with one compensating factor, and 40% front-end and 50% debt-to-income ratio with two compensating factors.
Manual Underwriting Guiidelines on VA Loans
As mentioned, credit disputes during the mortgage process does not have to removed on manual underwriting. Debt-to-income ratio on VA loans can exceed 50% on manual underwriting. Underwriters have a big influence on extending VA debt-to-income ratio caps using underwiter discretion.
VA loans is the same as FHA loans on manual underwriting. However, VA loans have more lenient guidelines on manual underwriting versus FHA loans.
Borrowers with approve/eligible findings on AUS with credit disputes do not have to remove disputes if the file gets downgraded to a manual underwrite. VA loans require timely payments in the past 12 months on manual underwriting.
What Happens With Credit Dispute During The Mortgage Process
When open credit dispute (s) accounts are encountered in the borrower’s credit analysis, the borrower must provide a letter of explanation and documentation supporting basis of dispute for any derogatory open credit dispute. The documentation but be consistent with other credit items in the borrower’s file.
Exempt Credit Disputes During The Mortgage Process
Is it acceptable to have credit disputes and qualify for a new mortgage loan? The short answer here is yes, but the guidelines are very specific and strict. There are certain types of credit disputes during the mortgage process that does not have to be removed.
Disputed medical accounts are excluded. A letter of explanation will be requried by the mortgage underwriter. Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use are also excluded from the $1,000 limit.
If you have derogatory tradelines due to identity theft, you need to provide file supporting documents such as a letter from the creditor, or other appropriate documentation to support dispute – e.g., police report disputing the fraudulent charges.
Mortgage Guidelines in Community Property States
Disputed derogatory credit accounts of a non purchasing spouse in Community Property States are excluded. Nonderogatory disputed accounts are excluded from the $1,000 cumulative total and manual downgrade provided the following conditions apply.
You do not have to remove disputed collection accounts with a zero balance. Credit disputes older than 24 months does not have to be removed. Credit disputes that you are paying as agreed that are current do not have to be removed.
Case Scenarion of Credit Disputes Affecting Mortgage Process
Recently one of my clients was qualifying for a home valued well over half a million dollars. He and his wife have very good income, and they were able to provide at least 20% down payment towards their new home from the sell of their existing home. All things looked good. Like many of us, there were life situations in their past and in previous years.
The borrowers had derogatory reports on their consumer credit report for what would seem small amounts. Considering they were purchasing a half a million dollar home, lenders will scrutinize any derogatory credit tradelines.
The borrower knew the collections were incorrect and disputed the amounts totaling less than $2,000.00 for a total of 5 disputes. The mortgage application came to a stop. The lender considered this was not a complete file and put the file in suspese due to derogatory credit disputes. After reviewing credit disputes, most of them were aged.
The Importance of a Solid Pre-Approval
Some of credit disputes had zero balance and were exempt. Only one of the open disputes was not exempt. It did not comply with the above guidelines to qualify as exempt. For this file to move forward, retracting the open derogatory dispute had to happen.
How Removing Credit Disputes Can Lower Credit Scores
Retracting the credit dispute would impact the borrowers FICO credit scores. The best option was to pay the amount and get the creditor to completely remove the profile from their consumer credit report. The point is if you are planning on qualifying for a mortgage in the near future, know what is on your credit report.
If there are errors or you would like to dispute any of the credit reports then consult with a Lender to find out if the dispute would impact you qualifying for a new mortgage.
You do not need to hire expensive credit repair companies to fix your credit. You can pull your credit report for free once a year from Free Annual Credit Report and review your file. Whatever a credit repair company can do, you can do it better. Lending Network, LLC can provide resources and direct you towards credible professionals. The Team at Lending Network, LLC is available 7 days a week, evenings, weekends, and holidays.
