Did you know that disputing an error on your FICO credit report can actually get your home loan denied? And didn’t your lender and/or ‘credit repair’ guru tell you to dispute all the derogatory accounts in your credit report in hopes of increasing your FICO credit score?
Fannie Mae and Freddie Mac have adjusted their qualifying guidelines requiring any credit account that reports as ‘in dispute’ on a borrower’s credit report, must be removed or updated to report as ‘resolved’ before allowing your loan to receive final approval and fund. This affects all loans, including FHA/HUD, VA, USDA and Conventional loans programs. The info can be read here at bottom of page 6 Fannie Mae Version 7.1. 
What’s the Big Deal?
Most ‘credit repair’ companies dispute all derogatory accounts, even the legitimate ones, hoping that the creditor will not respond or validate the debt with-in 30 days. If creditors don’t respond to the dispute with-in 30 days, the credit bureaus, Experian, Transunion, and Equifax are required to drop these accounts from the consumers credit file…..which may raise he consumer’s FICO credit score.
The problem is when the mortgage lender runs the borrowers loan application through Fannie Mae or Freddie Mac’s automated software loan approval system, it doesn’t read it or ‘grade’ the disputed derogatory account in the credit report. This will cause the automated approval engine to give a ‘false positive’ approval. This results in an approval with less than the full credit profile…..a big no no in the secondary market where mortgages are sold to investors for servicing rights.
It took a while, but Fannie Mae & Freddie Mac are onto this ‘scheme’. They now require ALL borrowers to have ALL disputes report as ‘resolved’ on the credit report.
Once the dispute is removed or resolved at the bureau level, the credit report must be re-run and the automated re-run to see if it still approves.
Manual Underwrites
If you are unable to remove the disputed status or unable to get the creditor to report it as resolved, Fannie Mae and Freddie Mac will not accept an automated approval and down grade it to a manual underwrite. So what, big deal, right? Bring on the manual underwrite!
Manual underwrites often trigger a whole different set of qualifying criteria than an automated underwritten approval.
- Manual underwrites often limit DTI ratios’ to 41% or 43%. This can significantly reduce how much you qualify for.
- Manual underwrites will often require a verification of rent with canceled checks to prove rent was paid on time.
- Manual underwrites can take longer.
Delays Closing
If the borrower cannot meet the manual underwriting criteria needed for a loan approval, it will often take 2-3+ weeks to get the credit account in dispute removed. Some creditors who are reporting a charge-off or collection that you are disputing will actually ask you to you to pay them money to report it as resolved……the nerve of them to ask for their money! If it’s a wrong collection, then it should be fairly easy to prove you don’t owe anyone money and get this resolved.
If you are preparing to get pre-approved, it would be wise to work with a mortgage lender (like me) who knows what to look for BEFORE you enter into contract and get tripped up by something as trivial as this. You would be utterly shocked at how often a loan officer calls a borrower in contract at the last minute asking them to fix their credit report. This adds a lot of undue stress to the closing process and often triggers costly per diem fees that the buyer ends owing the seller, or worst case, get your loan denied and lose your $3,000 earnest deposit.
I can show you how to get these disputed accounts to report as resolved in a matter of 3-5 days.
UPDATE———-UPDATE———-UPDATE———UPDATE
For FHA loans, a manual downgrade of the TOTAL Scorecard Accept/Approve findings is NOT REQUIRED for disputed accounts listed on the credit report if the disputed account meets one of the following conditions:
- The disputed account has a zero balance
- The disputed account is marked as “paid in full” or “resolved”
- The disputed account is both:
- Less than $ 500 and 2. More than 24 months old
Evidence that disputed accounts meet the above conditions must be documented by a credit report supplement or documentation directly from creditor. If the disputed account does not meet the above, then the loan must downgraded to a manual underwrite and meet all manual underwriting criteria.
I can be reached at (951) 215-6119 or brad(at)homeloanartist(dot)com to discuss your loan options and answer any questions you have about qualifying for a home mortgage.
Brad,
I just read your article. We are trying to fix this right now. I have 4 items on my credit report listed as open disputes from 6 years ago. 2 old student loans that were paid off and two old credit cards. I disputed for like a stupid 30 date late charge on one of them.
I tried calling Transunion to clear one of them on the phone and they couldn’t even locate it.
I got the partial account number wrong – it was from that account number I had back in 0006 not the one on the partial report the loan guy cut and paste in an email to me to fix.
Looks like from your article I need to contact the folks and see if we can get it listed as resolved ASAP.
Any advice for me to knock this out quick? You know the drill, underwater mortgage family guy can save over $450 on a 2 loan house that is underwater by doing the first loan at 4.5 instead of 6.25 but the snafu hits and the wife says hey take care of this asap.
Tim
All mine have zero balances.
All of mine have zero balances that are a problem, anything I can do in my favor. I am dealing with Quicken on a Freddy.
Tim,
What you need to do is start a dispute/resolution directly with Equifax, Transunion, and Experian online. Just tell them you no longer dispute the info on the credit report and to please report as resolved. This should take 15-30 days to get back to a resolved status once requesting.