Credit Disputes During The Mortgage Loan Process
This article will cover the mortgage guidelines for credit disputes during the mortgage loan process. Credit disputes during the mortgage process are not allowed on non-medical collections and derogatory credit tradelines. The reason for credit disputes from consumers is to dispute derogatory credit tradelines in the hopes of getting them removed by the credit bureaus.
Certain types of credit disputes are exempt from being removed. Medical collections, non-medical collection accounts with zero balance, credit disputes on credit tradelines that are two years old from the date of last activity (DLA), and non-medical credit disputes that the total aggregate outstanding balances is less than $1,000.
It is best recommended not to go through any credit repair regimen during the mortgage loan application process. If you get an approve/eligible per automated underwriting system with credit disputes, the mortgage process can proceed if the file is downgraded to a manual underwrite. Only FHA and VA loans allow manual underwrites. Consumers who have bad credit and need to repair credit normally go about disputing derogatory credit items to the three major credit reporting agencies;
In the following paragraphs, we will cover the mortgage guidelines on credit disputes during the mortgage loan process.
How Does Credit Repair Work
Consumers need to write credit dispute letters to the credit reporting agencies requesting that to investigate derogatory tradelines. Credit reporting agencies have 30 days to notify the creditor and get verification on the disputed item. If the creditor does not respond or come back with validation, the credit dispute is considered valid. The credit bureaus need to delete them from the consumer credit report.
How Consumers Dispute Credit To Credit Bureaus
Disputing a derogatory credit tradeline is a process that takes time. If you have solid documentation proving the negative credit tradeline is an error or does not belong to you, the credit bureaus normally remove the error and updates your credit report. However, most consumers dispute negative credit tradelines and state that it does not belong to them without any supporting documentation. Without supporting docs, it is difficult getting derogatory credit tradelines removed. The credit dispute process with the credit bureaus normally takes 60 or more days if consumers do it.
Lenders can do a rapid rescore where it takes three to five days. To do a rapid rescore, the loan officer needs proof that the credit tradeline is wrong. It gets updated in no longer than 5 days. In the event, if credit reporting agencies do not remove derogatory information after the original credit dispute the first time, consumers can re-dispute negative credit items.
Credit disputes with the credit bureaus is done by sending them follow up credit dispute letters hoping the credit reporting agencies will eventually remove them. Removing negative credit items will clean up a credit report and can potentially improve credit scores.
Mortgage Application Process With Active Credit Disputes on Credit Report
Borrowers with prior bankruptcies and foreclosures can qualify for mortgage loans. FHA loans are the most popular loan program for borrowers with less-than-perfect credit and higher debt-to-income ratios.
Homebuyers can qualify for FHA loans two years after a Chapter 7 Bankruptcy discharge date. Buyers can qualify for FHA loans one year into a Chapter 13 Bankruptcy repayment plan with Trustee Approval.
Homebuyers can qualify for FHA loans with no waiting period after a Chapter 13 Bankruptcy discharg date. For homebuyers with a foreclosure, short sale, or deed in lieu, there is a mandatory waiting period of 3 years from the official date of the foreclosure to qualify for FHA loans.
Rebuilding Credit After Bankruptcy Versus Credit Disputes
The first thing most consumers want to do after getting a bankruptcy discharge is hiring a credit repair company to delete prior derogatory credit tradelines that were included in bankruptcy. Credit repair after bankruptcy discharge is not recommended. Deleting credit tradelines prior to bankruptcy will do absolutely nothing to boost your credit score or get you a mortgage.
Rebuilding credit with new credit is key in rebuilding credit after bankruptcy. For folks who have just filed bankruptcy and/or foreclosure, it is strongly recommended that they start repairing their credit and start rebuilding their credit scores.
When their waiting period is up, they can qualify for a residential mortgage loan. Repairing credit involves credit disputes with credit reporting agencies. However, if the waiting period is almost over and mortgage applicants intend on getting a mortgage, they cannot have any pending credit disputes on non-medical collections and charge off accounts.
What Happens To Mortgage Loan Applications If There Are Credit Disputes?
Lenders will suspend a mortgage file if there are active credit disputes on non-medical collections, charged-off accounts, and derogatory credit tradelines. Retracting credit disputes will drop credit scores. The reason for the credit score drop is because whenever someone disputes a credit tradeline, the credit bureaus will automatically discount the disputed item from the credit scoring model. Many folks do not realize this and ruin their plans.
Guidelines on Credit Disputes During Mortgage Process
Credit Disputes And Mortgage Process do not go hand in hand. Mortgage Applicants where they are nearing the mandatory waiting period are a month or two away and are planning on applying for a mortgage, they need to make sure that there are no active credit disputes pending on the credit report.
Mortgage Loan Applicants who still have credit disputes and are ready to apply for a mortgage loan need to retract credit disputes before starting the mortgage application process.
Loan Officers can assist borrowers. For consumers who have hired a credit repair company, credit repair companies can do more damage than good during the mortgage process. There are many instances where creditors will not cooperate with consumers and not remove credit disputes. Retracting credit disputes can possibly drop credit scores, so keep that in mind also if credit scores are on a borderline cutoff requirement for a specific mortgage program.
Examples of Common Inaccuracies:
- Incorrect Personal Information:
- Examples: Misspelled names, incorrect addresses, wrong Social Security numbers, incorrect date of birth.
- Impact: These errors can lead to mismatched credit information, making it difficult for lenders to verify your identity and potentially resulting in delays or denials of credit applications.
- Duplicated Accounts:
- Examples: The same account was listed multiple times with different balances or statuses.
- Impact: Duplicated accounts can artificially inflate your debt levels and negatively affect your debt-to-income (DTI) ratio, a critical factor in mortgage approvals.
- Fraudulent Accounts:
- Examples: Accounts opened fraudulently in your name without your knowledge.
- Impact: Fraudulent accounts can severely damage your credit score and financial reputation. If not resolved promptly, they can lead to increased debt and potential legal issues.
- Incorrect Account Statuses:
- Examples: Accounts reported as open when closed, or vice versa; incorrect reporting of delinquency or default statuses.
- Impact: Incorrect account statuses can misrepresent your creditworthiness, leading to higher interest amounts or denial of credit.
- Wrong Payment History:
- Examples: Late payments reported incorrectly, payments not recorded, accounts showing as delinquent despite being up to date.
- Impact: Payment history is the most significant factor in your credit score. Incorrect late payments can lower your score and affect your ability to ensure favorable loan terms.
- Incorrect Balances and Credit Limits:
- Examples: Accounts showing higher balances than actual, incorrect credit limits reported.
- Impact: Incorrect balances can negatively impact your credit use ratio, an important factor in your credit score calculation.
- Inaccurate Public Records:
- Examples: Bankruptcies, liens, or judgments reported incorrectly.
- Impact: Public records have a substantial negative impact on credit scores. Incorrect information can severely affect your ability to obtain credit.
- Outdated Information:
- Examples: Accounts that should have been removed after the statutory period (e.g., bankruptcies older than 10 years, collections older than 7 years).
- Impact: Outdated negative information can continue to drag down your credit score unnecessarily.
Frequency and Impact of These Errors on Credit Scores:
Frequency:
- Common Occurrence: Studies show that around 20% of consumers have errors on their credit reports. Some discrepancies are minor and easily corrected, while others can be significant and harder to resolve.
- Regular Monitoring Needed: Given the prevalence of errors, it’s crucial for consumers to regularly monitor their credit history reports from all three major bureaus (Equifax, Experian, TransUnion).
Impact:
- Credit Score Fluctuations: Errors can cause fluctuations in your credit score. Even minor inaccuracies can significantly change your score, impacting your loan eligibility, interest rates, and credit terms.
- Loan Approval and Terms: Lenders rely heavily on credit reports to assess risk. Errors that lower your score can result in higher interest rates, less favorable loan terms, or outright denial of credit applications.
- Financial Health: Persistent errors can damage your financial health, making it harder to secure credit, buy a home, or even get a job in some cases.
- Time and Effort: Resolving errors can be time-consuming and requires effort in terms of documentation and communication with credit bureaus and creditors.
Conclusion
Addressing common errors on credit reports is essential for maintaining a healthy credit profile. Regular Monitoring and prompt dispute resolution can ensure that your credit report accurately shows your financial behavior, thereby improving your chances of securing favorable mortgage terms and other credit opportunities.
A credit dispute is a process by which a consumer challenges the accuracy or completeness of information on their credit report. This involves contacting the credit bureaus or the creditor to have the erroneous information investigated and potentially corrected.
2. How can a credit dispute affect my mortgage application?
An active credit dispute can complicate the mortgage application process. Lenders may require the dispute to be resolved before proceeding, as disputes can temporarily change credit scores and obscure the borrower’s true credit profile.
3. Should I resolve all credit disputes before applying for a mortgage?
Yes, resolving any credit disputes before applying for a mortgage is generally advisable. This ensures that your credit record accurately reflects your creditworthiness, smoothing the underwriting process.
4. Can I get a mortgage with an active credit dispute?
It can be challenging to get a mortgage with an active credit dispute. Some lenders may only proceed once the dispute is resolved. In contrast, others may require additional documentation to assess your creditworthiness accurately.
5. How long does it take to resolve a credit dispute?
Resolving a credit dispute typically takes 30 to 45 days, as credit bureaus and creditors need time to investigate the claim and make any necessary corrections to your credit report.
6. What should I do if I discover an error on my credit report during the mortgage process?
If you find an error on your credit report during the mortgage process, contact the credit bureau and the creditor to initiate a dispute. Inform your lender about the dispute and provide any relevant documentation. Be prepared for potential delays in your mortgage application.
7. Can a lender ignore a credit dispute and proceed with the mortgage?
Most lenders will not ignore a credit dispute. They typically require the dispute to be resolved to ensure the accuracy of the credit report. However, some lenders may consider proceeding if you provide additional documentation and explanations.
8. How do credit disputes impact my credit score?
During a dispute, the disputed item may be temporarily excluded from your credit score calculation, resulting in a temporary increase or decrease in your credit score. Once the dispute is resolved, your score may reflect the corrected information.
9. Will resolving a credit dispute improve my chances of getting a mortgage?
Resolving a credit dispute can improve your chances of getting a mortgage if the dispute results in removing or correcting negative information on your credit report, thereby improving your credit rating and overall credit profile.
10. Should I notify my lender about ongoing credit disputes?
Yes, you must notify your lender about any ongoing credit disputes. Transparency helps the lender understand your situation and may prevent complications during the underwriting process.
11. What documents should I provide my lender regarding a credit dispute?
Provide your lender with documentation related to the dispute, including dispute letters, responses from the credit bureau or creditor, and any corrected credit reports. This helps the lender assess the situation more accurately.
12. Can a resolved credit dispute negatively affect my mortgage application?
Once a credit dispute is resolved, the corrected information on your credit report should not negatively impact your mortgage application. However, the underlying issue may still affect your creditworthiness if the dispute does not result in a favorable correction.
13. How can I prevent credit disputes from affecting future mortgage applications?
Monitor your credit history regularly for errors and address discrepancies before applying for a mortgage. This proactive approach will ensure that your credit report is accurate and complete when applying.
14. Are certain types of disputes more problematic than others during the mortgage process?
Disputes involving significant negative items, such as late payments, collections, or charge-offs, are more problematic. These items substantially impact your credit score and overall credit profile, making their resolution critical before applying for a mortgage.
15. What resources are available to help resolve credit disputes?
You can resolve credit disputes directly by contacting the credit bureaus (Equifax, Experian, TransUnion). Additionally, consider seeking assistance from credit repair agencies, financial advisors, or legal professionals specializing in credit issues.
Credit Repair During The Mortgage Process
Borrowers do not need credit repair to qualify for a mortgage. Older derogatory credit items do not affect credit scores. Whatever a credit repair company does, consumers can do it themselves. Credit repair can do more damage than good.
Borrowers can qualify for home loans with older derogatory credit tradelines on their credit reports. Mortgage loan applicants need to realize that trying to delete older derogatory credit tradelines does not make an impact on credit scores. Any older derogatory credit tradelines older than 12 months old has little to no credit impact on the borrower’s credit scores.
Lenders do want to see timely payments in the past 12 months. Re-established credit after bankruptcy and/or housing event is a must. Please get in touch with Gustan Cho Associates at 800-900-8569 or text us for a faster response to qualify for home loans with bad credit. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.
