This guide covers how credit disputes during mortgage can be a reason for loan denial. It is important for loan officers and borrowers to realize that credit disputes can delay the mortgage process and the closing. The three credit reporting agencies (TransUnion, Experian, and Equifax ) often report inaccurate information on consumers’ credit reports. The only way to correct this is to dispute the inaccurate information with the credit bureaus and/or creditors.
Many consumers who want to repair their credit, either by themselves or through a credit repair company, need to do it by disputing negative credit items with the credit reporting agencies. Credit disputes are done by stating that the derogatory credit information posted on the consumer’s credit report is inaccurate. This article will cover and discuss credit disputes during mortgage process.
How Consumers Do a Credit Dispute During Mortgage for Derogatory Credit
When consumers first write a credit dispute letter to each credit bureau reporting it, the bureaus will post that the account is in dispute on the credit report while investigating the dispute. The credit reporting agency will then notify the creditor of the credit dispute. The creditor has 30 days to respond to the bureaus regarding the validity of the consumer’s credit dispute. Dale Elenteny, a senior mortgage loan originator at Mortgage Lenders for Bad Credit, says the following about credit disputes during mortgage process:
If the creditor does not respond to the credit dispute with the credit bureaus, the credit reporting agency needs to remove the inaccurate information by federal law. In many instances, the credit reporting agencies still do not remove the negative disputed credit item, and the consumer’s credit report still will state that the credit item in question is still under credit dispute.
You cannot have certain credit disputes during mortgage process, or your mortgage loan process will suddenly halt. The mortgage process cannot continue until the credit disputes have been retracted and removed from your credit report. This can cause delays in the mortgage process, getting a mortgage loan approval, and closing on your home loan.
Non-Medical Credit Disputes During Mortgage Reason For Loan Denial
One great advantage of medical collections is that the mortgage industry is more lenient with credit disputes during mortgage process with outstanding medical collections. Mortgage lenders categorize collection accounts into two separate categories:
- Medical collections
- Non-Medical Collections
Credit disputes during mortgage process on medical collection accounts are exempt:
- Consumers can dispute negative medical collection items, and that will not affect credit disputes during mortgage process
- Borrowers can have unpaid medical collection balances
- It will not affect them during the mortgage loan application and mortgage underwriting process
- There may be lenders that will not accept credit disputes during mortgage process with medical collections
- But borrowers do run into a lender that will tell them to retract medical collection account credit disputes during mortgage process
They then get a different lender because medical collection accounts and credit disputes are exempt.
Credit Disputes During Mortgage On Non-Medical Collection Accounts
Certain mortgage lending guidelines exist for credit disputes on non-medical collection accounts during the mortgage process. Mortgage applicants who have unpaid collection accounts with zero balances can have credit disputes during mortgage process.
Suppose borrowers have unpaid non-medical collection accounts greater than $1,000 (all unpaid collection accounts from all creditors). In that case, they must retract all credit disputes before the mortgage process can proceed.
Charge Off Credit Disputes During Mortgage Reason For Loan Denial
Loan Applicants can have charged-off accounts on their credit report and qualify for a mortgage loan without having to pay it off. Lenders ignore charge-off accounts. You cannot have credit disputes during mortgage process on charge-off accounts, or your mortgage process will halt until the credit disputes are retracted. Do not dispute charge-off accounts if you intend to apply for a home loan.
Issues With Retracting Credit Disputes During Mortgage Process
Retracting credit disputes during mortgage process can significantly negatively impact the mortgage loan borrower. If you retract a credit dispute, the chances are that your credit scores will go down. Dale Elenteny, a senior mortgage loan officer at Mortgage Lenders for Bad Credit says the following about credit disputes during mortgage process:
Suppose you barely meet the minimum credit score requirements to qualify for a home loan and must retract credit disputes during mortgage process. In that case, the drop in your credit scores may make you ineligible to qualify for a home loan.
There are many instances where a mortgage loan borrower qualified for a home loan with their credit scores but did not qualify for a home loan after the credit disputes were retracted. There are instances where the consumer’s credit scores can drop more than 50 FICO points by having the credit disputes retracted.
This is an extensive and concise breakdown—an FAQ guide on credit disputes during mortgage process—one of the most frequent reasons lenders deny mortgage applications. Borrowers and professionals alike know how disputes influence mortgage approval and how to mitigate the issue.
Frequently Asked Questions (FAQs) on Credit Disputes During Mortgage Application
A Common Reason for Loan Denial
What is a credit dispute?
Credit disputes happen when consumers raise contests based on the accuracy of an item on their credit report. This might include collections, late payments, or any other tradeline a borrower thinks is incorrect. The credit bureau will temporarily mark these as “in dispute” while they investigate.
How do Credit Disputes During Mortgage Affect My Loan Application?
Underwritten mortgage credit report disputes are known for stalling progress toward obtaining a loan. Generally speaking, disputed tradelines are likely to conflict with loan approval. In most underwriting systems, especially those used for FHA, VA, or conventional loans, the existence of active accounts with credit disputes is not accepted.
Mortgage lenders do not underwrite against accounts with disputes because disputes can inflate credit scores artificially, hiding derogatory information and, ultimately, leading the lender to an incomplete and inaccurate risk assessment.
Can a credit dispute trigger a mortgage denial?
That’s right, they can. Credit disputes are one of the most common and avoidable issues causing delays or denials of mortgage applications. Most automated underwriting systems will deny the loan acceptance if conflicts are found, particularly with balances over $1,000.
Do any exceptions to the rules of credit dispute exist?
Yes. Most lenders and loan programs generally accept medical disputes and zero-balance disputed accounts older than two years. Additionally, disputes deemed fraud-related (with adequate proof) still fall under reimbursement exceptions. These guidelines shift frequently based on lender, loan type, and underwriting standards.
What should I do if I have credit disputes before applying for a mortgage?
For an applicant with no claimable exemptions, disputes should be resolved before an application is made. In this scenario, ‘resolving’ means:
- Removing the dispute from your credit report.
- Waiting for the report to change.
- Receiving pre-approval based on an updated profile.
If you’d prefer, you can directly contact the credit reporting agency or the creditor to initiate a dispute removal. Alternatively, some willing lenders will assist you swiftly.
How long does it take to remove a credit dispute?
Based on the credit bureau and type of account, dispute removals can take anywhere from a few days to several weeks. Their nature plays a significant role in determining how long it takes to remove the dispute. Sometimes, expedited removal becomes possible with the assistance of a lender or credit repair expert.
Will removing a dispute lower my credit score?
It’s a possibility. Removing the dispute flag could lower your score if the disputed item is negative (like a collection or late payment) because the system now counts the derogatory item back into the score. That said, lenders now have a more precise view of the borrower’s risk profile. That is crucial for loan approval.
What happens if I leave the dispute on my report during underwriting?
Most lenders will place your loan file on hold and request that the dispute be removed before continuing the process. Sometimes, and if the program permits it, the loan can be manually underwritten, which is not always guaranteed. If the disputes are left unresolved, the loan might get denied.
What if I didn’t know there was a dispute on my report?
This is particularly common in cases where a credit repair company handles disputes on your behalf or when users engage with credit monitoring services online. Always request a complete tri-merge credit report before starting the mortgage process. Review it in detail with your loan officer.
After fixing the disputes, can I reapply?
Of course, and many borrowers do. After removing the disputes and updating the report, you can resubmit your application or have your file resubmitted. Your loan should be able to progress after the issue has been resolved, which is usually the case.
