Think before you file a dispute.
Myth: This is a tough myth to bust as there is truth in the foundation but this truth is out of date in current underwriting practice. Yes, you are by law allowed, entitled even, to make a statement of explanation or enter a dispute on any credit account. Simply making a statement to clarify your position is considered a dispute.
Fact: Until such time as the term “Disputed Account” is removed from your credit report(s), you will not be able to obtain mortgage loan approval. This is clearly a case of damned if you do. Is this fair? Of course not. Is this real? Oh yes, this is very real. This information is current. If we see a relaxation of this policy, we will update this post.
Evan Hendricks reported the problem with the term “dispute” and how underwriters interpret the Fair Credit Reporting Act back in 2009. To this day the legal facts have not stopped underwriters from denying credit due to actively disputed accounts on credit reports.
So what is a person to do? Nichole “Niki” B called me on the suggestion of her attorney last week. Her problem is that she just sold her home and had a contract to purchase another. (NOTE: This was not my borrower.) Back to this real life story, her possessions and those of her two children were in a moving van. The underwriter said NO to her purchase mortgage. The problem was that there were two open disputes on her credit reports.
Niki was absolutely beside herself. To say she was distraught would be a severe understatement. The first thing I did was help her calm down. I recalled previous Lamaze classes and in my most calming voice asked her to breathe deeply, breathe deeply . . . in . . . out . . . in . . . out. Take deep cleansing breaths.
This is what I counseled Niki to do: “Call both Experian and Trans Union and explain that the reported disputed accounts are no longer disputed. Explain that all disputes have been withdrawn. At the same time call the disputed account and tell them you are not disputing your account. Niki got lucky. Both credit bureaus and the creditor backed down in two days and removed the fatal Dispute word from her credit.
How was Niki able to get this done by phone and in such a short order is a close to a miracle as I’ve seen. I attribute it to her polite persistence. She continued to call the agencies and the creditor until she got a friendly person. (This is a great negotiation tool by the way, keep dialing until you get someone willing to help. This can also work with other situations but that’s for another blog.)
In reality, for all that dispute credit reports for errors – and I highly encourage such disputes – plan ahead. Make sure all disputes are resolved or removed prior to seeking mortgage loan approval. You have to be prepared to work within the system (it’s not really that hard to do). Hire only the most experienced mortgage lender.
Financially Speaking™ James Spray, CNE, FICO Pro CO LMO 100008715 | NMLS 257365 | February 18, 2011Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.
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UPDATE July 7, 2011. One of the major US Banks today recognized the identical criteria regarding disputed accounts for Conventional mortgages as FHA did on 5/2/11. A) Disputed account has $0 balance or, B) Disputed account is market as “paid in full” or resolved or, C) Aggreagate amount is 24 months old and, D) is not a Mortgage account.
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[…] You also have no new bad credit and no open credit disputes. […]
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UPDATE: 06/18/2012 – FHA rescinds $1,000 credit dispute rule – http://bit.ly/MhW9b4
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As of April 1, 2012 per HUD Mortgagee Letter 2012-3, if the Automated Underwriting System using the TOTAL Mortgage Scorecard rates the mortgage loan application as an Accept, the mortgage application will no longer be referred to a DE underwriter for review due to disputed accounts, as long as these accounts meet both of the following conditions:
• The total outstanding balance of all disputed credit accounts or collections are less than $1,000, and
• Disputed credit accounts or collections are aged two years from date of last activity as indicated on the most recent credit report.
If the borrower has individual multiple disputed credit accounts or collections with singular or cumulative balances equal to or greater than $1,000, the accounts must be resolved (e.g. payment arrangements with a minimum three months of verified payments made as agreed) or paid in full, prior to, or at the time of closing. The lender must obtain documentation supporting the payment arrangements or that the debit has been paid off. The payments arranged for the accounts must be included in the calculation of the borrower’s debt-to-income rations.
Disputed credit accounts or collections resulting from identity theft, credit card theft, or unauthorized use, etc., will be excluded from the $1,000 limit under the terms shown below. The mortgagee must provide in the case binder, a credit report or letter from the creditor, or other appropriate documentation, to support that the borrower filed an identity theft or police report to dispute the fraudulent charges. Mortgagees must provide documentation the case binder to show all disputed or collection accounts are resolved, verified as not a debt to the borrower, arrangements made for payment, or paid in full.
If the total outstanding balance is equal to or greater than $1,000 the borrower must resolve the accounts (e.g. entered into payment arrangements with minimum three months verified payments – paid as agreed) or paid in full at the time of, or prior to closing.
If the total outstanding balance of all collection balance of all collection accounts is less than $1,000, the borrower is not required to pay off the collections as a condition of mortgage approval. FHA continues to require judgments to be paid off before the mortgage loan is eligible for FHA insurance.
Note: Paying “down” of balances on disputed accounts and collections to reduce the singular or cumulative balance to below $1,000, is not an acceptable resolution of accounts.
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Removing dispute verbiage from a file must be done at the bureau level.
Borrower must provide a signed, dated letter specific only to the account name/number in question.
The letter must state the following… “I am not disputing this account; Please remove the dispute remark”
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The following update is from The Niche Report publshed today ~
“Fannie/Freddie Disputed Accounts: I have a client whose credit score is 739. They have four disputed accounts, which they paid off years ago. U/W is saying DU is requiring these accounts to come out of “dispute” status, and that a new report has to be run through DU without the disputes. Is there any way around this?
Answer: Unfortunately there is no way around this, and yes, it is accurate. If DU recognizes a dispute and provides a feedback message regarding the disputed account, the underwriter and lender are bound by these messages and must follow each message specifically.
You might ask: What is the big deal?… Well, most ‘credit repair’ companies dispute all derogatory accounts, even the legitimate ones, hoping that the creditor will not respond or validate the debt within 30 days. If creditors don’t respond to the dispute within 30 days, the credit bureaus, Experian, Transunion, and Equifax, are required to drop these accounts from the consumer’s credit file … which may raise the consumer’s FICO credit score.
The problem is when the mortgage lender runs the borrower’s 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.’ Fannie & Freddie require ALL borrowers to have ALL disputes reported as ‘resolved’ on the credit report. Once the dispute is removed or resolved at the bureau level, the credit report must go through the automated re-run to see if it still approves the loan.”
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I am in the process of a home refinance expected to close on Tuesday and a FL condo purchase that will close on 2/15. Credit Scores range 691-709. LTV on primary residence refinance is 28% (cash-in to get under 417k situation). Putting 30% down on Condo. DTI 16% after all is done.
Condo mortgage broker gave a conditional approval if I eliminate dispute notation per Fannie Mae one 1 Medical Collection Acct from 6 years ago. I’m concerned bc it is due to fall of my report in 10 months and the SOL has expired and if I contact creditor it may result in a status change or activity which may make debt appear current and impact score. Hs credit report shows “Account Information Disputed by Consumer” This has been showing on all credit reports since 2008 when I submitted online disputes. I montior FICO biweekly for years and then has not changed.
My primary loan which is also a Fannie product did not mention this condition or issue and we close Tuesday!
I just pulled credit and the verbage has changed from “Account information disputed by consumer” to “Dispute resolved-customer disagrees” with Transunion and “Consumer disputes after resolution” with Equifax. Do these two notations mean that there is not a dispute for Fannie purposes? If so, they could just pull credit and all is well. I am inquiring because I do not want to do an uneccesary rescore or contact make contact with the collection agency.
This debt is related to the fact that in a 18 hour period we were billed for 8 ultrasounds at $800 per ultrasound by a hospital. I am in healthcare and was there, my wife received one ultrasound not 8 and we will not pay more ultrsounds that were not received that exceed the price of delivery of a baby!! Regardless, only thing ever disputed. I just need to know if the new verbiage of “Consumer disputes after resolution and Dispute resolved-customer disagrees will result in a Fannie Denial in DU if we get them to try to re run.
Thanks,
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Alexis – Based on your statement of the verbige regarding live disputes on your credit reports, until the disputes are removed, you will not be approved by the underrwriter (UW) as you haven’t cleared the condition necessary to get closing clearance.
The bell has been rung, the UW has seen the dispute on at least two of the three credit reports. Given you can only see two of the three, you might as well assume the dispute is also showing on Experian, too.
Given you initiated the disputes in 2008, it is possible you self-extended the SOL on when the collection would have dropped off. That is however another subject.
If you wish to close on the loan in question, you are going to need to clear conditions. The only way to so do at this point is to close the dispute.This may require you to settle the dispute. Asl your loan originator if your UW will close around an open collection? I suspect this is not likely.
My regular readers are quite aware that I do not endorse any of the credit monitoring services. Sadly yours is a textbook case of how useless these services are for the average consumer.
I you wish you success. And for goodness sakes, close this useless monitoring service, save several hundered dollars a year and simply read my blog on how to build good FICO Scores.
Jim
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I was in the process of buying a home, but when my file was ran thru the automated system, it gave them a Refer with Caution. I do have an account in dispute with amount of $600. Would I need to get this verbiage removed to get an automated approval??
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Isabel – With the following exception* the disputed account must be closed prior to getting approval. Additional information is discussed in the comments section of this article.
*If the dispute is over a medical bill and you are applying for an FHA, VA or USDA insured loan, the underwriter can overwrite the dispute up to $1,000.
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Hi there….Im going conventional, but the lender said that when they ran thru automated system, it gave him a REfer due to dispute account. So if I pay off and remove dispute verbiage, then I should get an approval thru automated system?
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Maybe. It depends on the strength of your credit score and the original date the item you are disputing entered the credit reporting system. Paying the collection will update the negative report and lower your score. Talk with your local mortgage loan originator (MLO) and ask how to “settle for deletion”. Hopefully your local MLO is proficient with the term and the requisite steps needed to so do. My best thoughts are with you.
James Spray, CCMB, CNE, FICO Pro Sent from my Verizon Wireless Droid
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