Exempt Credit Disputes During The Mortgage Process

This guide covers derogatory exempt credit disputes during the mortgage process on FHA loans. Derogatory exempt credit disputes during the mortgage process are generally not allowed on FHA loans, with a few exceptions.  However, they can cause a major headache. Loan officers often make the mistake of issuing a pre-approval letter to borrowers with active derogatory credit disputes. This is one of the biggest mistakes loan officers can make.

HUD, the parent of FHA, does not credit disputes on FHA loans on non-medical collections and charge-off accounts and derogatory credit tradelines.

Over 80% of our borrowers at GCA Forums Mortgage Group are folks who either received a last-minute mortgage denial or are stressing over their mortgage process because the loan officer did not properly qualify borrowers. One reason is issuing pre-approval letters to borrowers with derogatory credit disputes during the mortgage process. Derogatory credit disputes during the mortgage process are normally not allowed. This rule has certain exemptions, which we will discuss in this blog.

How Credit Disputes Work

Credit disputes are often used by credit repair companies to delete derogatory credit tradelines. How this works is that consumers can dispute negative items from their credit reports by sending certified letters to credit bureaus. Most disputes state that the derogatory item is not the consumers.

The credit bureau, in turn, will notify the creditor in question. The creditor has 30 days to respond with the validity of the negative tradeline. If the creditor does not respond, the credit bureaus need to remove the disputed item.

However, this is not how it works in many cases. Many times, removing a credit dispute is next to impossible. Creditors will not remove a credit dispute even though consumers will request it in writing. This can stop the mortgage process indefinitely.

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Mortgage Programs That Do Not Allow Derogatory Credit Disputes During the Mortgage Process

During the mortgage application process, derogatory credit disputes can affect mortgage approval and the terms of that loan. In this section, we will cover the important information about how credit disputes can affect the mortgage process. HUD, the parent of FHA, is the only agency that will not allow derogatory credit disputes during the mortgage process. However, many lenders will have lender overlays where they do not allow derogatory credit disputes during the mortgage process.

Mortgage lenders will review your credit report as part of the application process. Suppose there are derogatory items on your credit report, such as late payments, collections, or charge-offs. In that case, they can negatively impact your credit score.

Disputing derogatory items on your credit report may temporarily remove them from your credit score calculations. However, lenders often look beyond the credit score itself. They may consider that you are disputing these items when making lending decisions. Lenders may view credit disputes as a potential risk. They might be concerned that you are trying to hide or manipulate your credit history to qualify for a mortgage. This can make them more cautious about approving your loan.

Resolution of Derogatory Exempt Credit Disputes During the Mortgage Process

Resolving credit disputes before applying for a mortgage is crucial. Lenders may require you to provide documentation showing that the disputes have been resolved and that any disputed items were either removed or updated to reflect the correct credit tradelines.

If you plan to apply for a mortgage in the future, consider improving your credit before starting the application process. This may involve paying off debts, resolving disputes, and ensuring that your credit report is accurate.

 If you have derogatory items on your credit report, you may still be eligible for a mortgage but face higher interest rates or less favorable loan terms. Lenders often offer better rates and terms to borrowers with higher credit scores and a cleaner credit history. Maintaining open communication with your lender throughout the mortgage application process is essential. If you have ongoing credit disputes, inform your lender and update them on the progress of the resolution.

Derogatory Credit Disputes During the Mortgage Process Not Allowed By Lenders 

When consumers dispute a derogatory credit tradeline, the credit bureaus automatically negate the negative factor from the credit scoring formula. This is why when consumers dispute negative trade lines, their credit scores go up. This is because once the dispute triggers, the scoring formula discounts the negative factor; therefore, the negative item is not factored in.

HUD, the parent of FHA loans, is the only agency that do not allow credit disputes on derogatory credit tradelines. VA, USDA, Fannie Mae, and Freddie Mac may allow derogatory credit disputes based on the findings of the automated underwriting system.

The item will remain on the credit report but not the negative factoring formula. When credit disputes are removed and the derogatory stays on the report, consumer credit scores will drop. A credit score with active credit disputes is not a true credit score. This is the reason why lenders do not allow credit disputes.

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Exempt From Removing  Credit Disputes During the Mortgage Process

HUD, the parent of FHA loans, does not allow credit disputes during the mortgage process. VA, USDA, and conventional loans allow credit disputes, but it is up to the automated underwriting system’s findings. Non-medical collection account credit disputes do not have to be removed. Any non-medical credit trade lines with zero balances do not have to be removed. Any non-medical derogatory credit disputes that are 24 months or older do not have to be removed.

Non-medical disputes with an aggregate outstanding balance totaling less than $1,000 are exempt from retracting credit disputes on FHA loans.

If there are many active credit disputes, the borrower’s file can be downgraded to a manual underwriting on VA or FHA loans. Borrowers with borderline credit scores with substantial credit disputes may not want to retract their credit disputes because they may drop their credit scores. Situations like these should be downgraded to a manual underwrite. In summary, derogatory credit disputes can complicate the mortgage application process. It’s essential to address these issues before applying for a mortgage, keep your lender informed, and be prepared for potential consequences such as higher interest rates or stricter lending criteria. Working on improving your credit can help you secure a better mortgage deal.

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