Tobias Team at Fairway Independent Mortgage Corporation

(480) 626-2202
2325 E. Camelback Road #100
Phoenix, AZ 85016
Arizona's #1 FHA Lender (2014)
NMLS #221602 | FIMC NMLS #2289

Mar 04 2011

How FICO Credit Report Disputes Can Get Your Home Loan Denied or Delayed

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.

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 the 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.

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