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Credit Disputes During Mortgage Process
HUD, the parent of FHA, does not allow credit disputes on the following:
1. Outstanding collection accounts that are not medical collections.
2. Charged off accounts
3. Late Payments in the past 24 months
4. Derogatory public records such as bankruptcy, foreclosure, deed-in-lieu of foreclosure, short sale, child support, federal and state tax liens, judgments, delinquent student loans, and other derogatory credit tradelines.
EXEMPT FROM CREDIT DISPUTES
1. Medical collections
2. Non-medical credit disputes that are on-time payments and good standings.
3. Non-medical disputes with zero balance.
4. Non-medical credit disputes with total credit tradelines with under $1,000 Outstanding Balance.
5. Collections and charge off accounts, late payments, older than 24 months.
VA, USDA, NON-QM, FANNIE MAE and FREDDIE MAC are normally EXEMPT from credit disputes. We have a YouTube live video aired today September 25th, 2023 at 10 am hosted from GCA Mortgage Group which we will post on this thread. Contact Gustan Cho Associates if you have any questions.
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10 Replies
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Qualifying for a mortgage with credit disputes on your credit report can be challenging, but it’s not impossible. Here are some factors to consider:
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Severity and Resolution of Disputes: Lenders will consider the nature and resolution of the credit disputes. If you have legitimate disputes that have been resolved and resulted in accurate updates to your credit report, it may be less of an issue than unresolved disputes or disputes related to significant derogatory information.
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Credit Score: Your credit score plays a crucial role in mortgage qualification. The impact of disputes on your credit score will depend on their nature. Disputes that remove negative, inaccurate information may actually improve your score, while disputes related to legitimate negative items may not help as much.
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Lender Policies: Different lenders have varying policies regarding credit disputes. Some may be more lenient, while others may have stricter requirements. It’s essential to research and potentially consult with multiple lenders to find one that’s willing to work with your specific situation.
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Documentation: Be prepared to provide documentation regarding the disputes and their resolutions. This can include letters from creditors indicating that the disputes have been resolved, as well as updated credit reports showing the corrected information.
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Credit History and Profile: Lenders consider your overall credit history and profile, not just the presence of disputes. If you have a strong credit history in other areas and can demonstrate responsible financial behavior, it may mitigate the impact of disputes.
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Down Payment and Income: Your ability to make a significant down payment and your income stability are also critical factors in mortgage approval. A larger down payment and a stable income can compensate for credit issues.
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Interest Rate: Even if you qualify for a mortgage with credit disputes, be prepared for the possibility of higher interest rates. Lenders may charge higher rates to borrowers with lower credit scores or credit history issues.
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Credit Counseling: If your credit disputes are related to financial difficulties, you might consider seeking credit counseling or working with a credit repair service to improve your credit profile before applying for a mortgage.
Ultimately, it’s essential to work closely with a mortgage professional who can assess your specific situation and guide you through the application process. They can provide insights into how your credit disputes may impact your ability to qualify for a mortgage and help you explore potential solutions or strategies to improve your chances of approval.
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Mortgage rules and regulations are so complicated. So many things don’t make sense. Great video about credit disputes.
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Correct. Mortgage industry is very ambiguous and not every lender has the same guidelines on government and conventional loans. Most lenders have higher credit requirements which are called overlays. Many lenders want credit disputes removed including exempt disputes.
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This is one reason it is so important for a client’s credit restoration service to work closely with the lender. In most all cases, before the final credit pull, we will make sure that all disputes are closed out and that the credit bureaus have been informed that the disputes are closed. This process can take up to 72 hours, but generally happens within 24. We like to run as many disputes as possible in our time frame, so we make sure that closing them out is part of the process. We have seen many times where a new client will still show in dispute although they have not disputed in over a year.
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Your requirements are relevant concerning how various loan programs, particularly those that government institutions guarantee, manage credit disputes during the mortgage application. A detailed description is as follows:
Credit Disputes Not Allowed.
HUD (Housing and Urban Development), the FHHA (Federal Housing Administration)supervisor, has regulations disputing credit items deemed eligible for FHA law.
It should be noted that the following items are often not open for dispute:
Outstanding Collection Accounts (non-Medical): There is no disputation of any collection accounts that are not medical collections. This can hurt one’s credit rating as well as the chances of qualifying for a loan Administered by FHA:
Charged-Off Accounts: Disputes do not arise with respect to the accounts charged off by the creditor, meaning that they have abandoned in vain the chances of recovering the debt on that account. All these accounts indicate many defaulted payments, thus affecting the credit quite immensely.
Late Payments within the Past Two Years: Late payments within the past two years are now two networks of the DMP program. They are regarded as negative remarks on their account and are likely to impact households’ credit.
Derogatory Public Records: This involves the bank, home, and everything else. Due to massive pending payments, these records have a major negative impact on society and are a crucial factor when determining one’s credit. Such items also cannot be contested for FHA loans.
Excluded from Credit Disputes
The following categories of disputes include some exceptions that may have a more positive impact on the evaluation made during the loan application:
Medical Collections: Medical debts are treated differently because of some of the issues involved with medical debt. They also understand that medical costs are unplanned, and one may resort to disputing medical collections.
Non-Medical Credit Disputes with On-Time Payments: Disputes related to paid-off or on-time payment accounts in good standing can also be excluded from the consideration process.
Non-Medical Disputes with Zero Balance: Payoff accounts showing a zero balance can also be disputed without affecting the loan application process.
Non-Medical Credit Disputes with Outstanding Balance Under $1,000: Such disputes have a range where the overall balance amount is at most one thousand dollars. These cases can be resolved through the credit evaluation process.
Collection and Charge Off Accounts Older Than 24 Months: A significant number of debts older than two years in settled disputes are more often ignored in credit dispute dealings.
Other Loan Programs
Programs like VA (Department of Veterans Affairs), USDA (United States Department of Agriculture), Non-QM (Non Qualified Mortgages), Fannie Mae, and Freddie Mac have special policies handling disputes involving credit as purely some VA and USDA-sponsored programs are not as strict in the following mentioned areas:
Items marked as derogatory on an applicant’s credit report that are older or certain types of credit disputes that in no way demonstrate the applicant’s habitual financial negligence, which would tarnish his credit worth and credit to these programs or loans. These loans are advanced to some specific groups of people, veterans, and rural low-income citizens, so they must not have the same standards of measures of creditworthiness as the rest do; these loans need not follow through with the same essential regulations regarding accounts that are the subject of a dispute. These government-sponsored entities issue policy guidelines that tend to be less restrictive so that an applicant will not need to go all on a credit dispute. This ensures that the applicant’s financial condition will be analyzed more fully.
The eligibility will be affected by such guidelines. Therefore, any mortgage applicant must understand these. If there are disputes on your credit report, it will help you know what disputes can be considered and which cannot refine your application. If you are unsure of how your case will be evaluated, you may speak with a mortgage agent who can help you with such questions.
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How do Fannie Mae and Freddie Mac differ in their dispute handling?
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Both Fannie Mae and Freddie Mac, being government-sponsored entities (GSEs), have their own rules and policies regarding credit disputes. However, they do have a great deal in common. Here’s an in-depth analysis of how they resolve disputes concerning credit:
General Approach towards Credit Disputes
Fannie Mae:
Fannie Mae, in general, takes a rather liberal view of credit disputes. They consider the overall risk of the borrower’s profile rather than strictly following a matrix of disallowing factors.
Their policies have used the following: when the borrower has a reasonable overall financial position, and there is no evidence of recent late payments, the late payment records can be disregarded as a standard guideline in their frameworks.
Freddie Mac:
Freddie Mac is also similar. It takes a flexible approach to credit disputes, and the target concern is a borrower’s overall financial situation.
On the other hand, they look at the history of the credits that have been extended. However, they place greater emphasis on recent categories of credit that the borrower has exceeded in terms of payment timing.
Specific Guidelines
Fannie Mae:
Disputed Accounts: According to Fannie Mae guidelines, disputes can be ignored as long as the borrower can show that the account in question is not a current negative factor in their loan repayment.
Regarding documentation, borrowers may need to explain the nature of the dispute and the creditor’s communications.
Freddie Mac: Disputed Accounts: Fannie Mae’s case is similar. Freddie Mac ignored the disputes during the credit evaluation if the borrower had stated other accounts needed to be settled promptly.
Lender Discretion: Freddie Mac considers that there are instances when the borrower’s current disturbances should be ignored, especially when the borrower’s behavior toward finances is considered for dispute handling.
Addressing Medical Collections Fannie Mae and Freddie Mac are soft on medical collections as everybody knows it’s medical debt. However, the bad side is that disputes on medical accumulation will not alter the general credit evaluation for each GSE, especially the top-screened ones.
Old Derogatory Marks Fannie Mae: It has been suggested that accounts that have been opened and active for more than 24 months will take little consideration when examining the credit score as long as the borrower has made regular payments of the underwriting filed in recent times. They can be handled more kindly.
Freddie Mac: Apparently, they need to pay attention to the age of the derogatory marks and may allow the use of these accounts if the borrower has had a good credit history recently.
Factors of Underwriting
Both examine subprime lenders’ overall creditworthiness. In other words, a Loan may be given even with a few disputed accounts if the borrower is earning substantially, has low or no debt-to-income effect, and has a record of debt repayment in the past.
Both institutions aim to manage risk for borrowers with a credit dispute history. Still, with similar guidelines, how they go about it differs. The limitation of reaching lenders’ discretion power. In such cases, they do not care about the prior disputes of the borrowers but focus on recent balance sheets and credit history. Knowing these details can assist borrowers in the mortgage application process more effectively, particularly in a credit dispute. If you are planning a mortgage application and have problems with credit, please ensure you speak to a suitable lender to decide on the best course of action.
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What constitutes a “strong overall credit profile” for Fannie Mae and Freddie Mac?
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With the cooperation of the United States Congress, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) have created programs that help home buyers with strong credit profiles. These two entities, Fannie Mae and Freddie Mac, can purchase mortgages from banks and other financial institutions, which in turn offers them greater leverage. A strong borrower includes:
Credit Score
Minimum Requirements: At Freddie Mac, loans with low down payments are offered to customers with credit scores of 620 or higher. This scenario enables lenders and other financial institutions to strengthen their position while lending. However, they need to work on improving their scoring profiles.
Impact of Credit Score: Responsible credit management leads to better loan terms, which allow individual borrowers to use better resources. When a credit score reaches a certain level, it opens more opportunities for them.
Payment History
On-Time Payments: Timely payments affect Fannie Mae’s and Freddie Mac’s mortgage decisions in the long run. Otherwise, they would never consider customers with poor payment histories.
Derogatory Marks: Furthermore, having no recent derogatory marks bolsters a credit profile, including a history of no late payments, charge-offs, or debt collection.
Debt-to-Income (DTI) Ratio
Acceptable Ratios: Borrowers are in good shape if their DTI is less than 36%, allowing for reasonable debt levels. However, most lenders opt for a maximum DTI ratio of 43%. This clearly demonstrates that Fannie Mae and Freddie Mac prefer lower ratios, but the high leverage used to provide these loans strengthens their position to take such risks.
Calculation: The formula for this ratio is dividing the monthly debt outgo (potentially with the mortgage installment) by gross monthly income.
Credit Mix
Type of Credit: Credit adds diversity to the credit profile and can be used for credit cards, installment loans, mortgages, etc. Such demonstrates the borrower’s capacity to handle different types of credit.
Credit History: As a rule, having a longer good credit history also positively impacts one’s creditworthiness.
Assets and Reserves
Cash Reserves: The existence of liquid assets or reserves in savings and retirement accounts – strengthens a borrower. In most lending practices, most lenders seek reserves sufficient to meet a few months’ mortgage payments as proof of financial stability.
Down Payment: Larger down payments (20% and above) usually enhance the entire profile by lessening the LTV ratio, possibly attracting better loan terms.
Employment Stability
Consistent Employment: Consistent employment covering an uninterrupted period of 2 years with the same employer or in a related occupation is a sign of reliance on income generation.
Income Verification: All lenders have to verify income using various mechanisms, such as pay stubs or tax returns, to determine its adequacy for mortgage repayments.
Recent Credit Behavior
No Recent Disputes: The absence of recent credit disputes or open accounts that still need to be cleared implies good credit practices.
Recent Credit Inquiries: Recent hard inquiries into the credit report (generally three or fewer for the past year) can also be considered an assurance.
According to Fannie Mae and Freddie Mac, a good overall picture is a good predictor of timely payment, a low debt-to-income ratio, a good credit history with multiple credit products, sufficient collateral or reserves, a stable work history, and good recent credit management. Borrowers must consider these aspects to improve their chances of a successful mortgage application. A qualified mortgage specialist can also recommend which areas of your creditworthiness you should improve before applying for the loan.
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