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Give a Hoot, Don’t Dispute!

Are you in the market for a mortgage? Know this rule: Don’t dispute derogatory credit right before or during the mortgage application process. Everyone knows you have get your credit in the best possible shape prior to applying for a mortgage. Credit repair is the almost always a good idea. But cleaning up your credit report is only part of the battle. Avoiding the dispute process is a necessity just prior to application time.

It is counterintuitive, but filing a dispute to challenge a derogatory account will get your mortgage application delayed or rejected. It’s a stupid “rule”. And many consumer protection organizations have been trying to get it changed.

Why Not File a Dispute Just Prior To Mortgage Application?

The Fair Credit Reporting Act (“FCRA”), permits consumers to dispute inaccurate account information. When a dispute is filed, Credit Reporting Agencies, (“CRA’s”, Equifax, Experian and TransUnion), may place a notation on the disputed account, such as: “Account information disputed by consumer”. This notation is the death of many mortgage applications. (This notation isn’t all bad. It will not hurt your credit score, and it may actually give you a temporary bump in score during the dispute investigation).

Lenders (mortgage companies) have determined that credit reports with disputed items are risky and not fully accurate. (It may cause your score to be temporarily inflated). As a result, lenders may require this “disputed” status to be removed before approving a mortgage application. This leaves some consumers with a difficult decision to make — let these damaging credit reporting errors remain or delay applying for a loan until disputes have been resolved.

Problems With Automated Underwriting
Automated underwriting is a fancy term for a computer making a decision on
whether to approve your loan or not. When relevant information about you and your credit is entered into the system, the computer spits out a decision.

If you have any accounts in dispute, lenders cannot run this automated
underwriting of your loan and they will delay your loan application until your
accounts are taken out of dispute. Lenders have the ability to perform “manual underwriting”, but most will not go to the time and trouble to do so. As a result, prospective home buyers suffer.

Automated underwriting systems such as Desktop Underwriter (DU), automatically issue the warning message “consumer disputed” when a credit report reveals a 30-day or more delinquency reported within 2 years of the inquiry. As a result, the lender must confirm the accuracy of your credit report by pulling a new report without the dispute. (An exception to the no-dispute rule may be FHA mortgages that still may be approved with a disputed credit report).

In 2016 the National Consumer Law Center, (NCLC) wrote a letter to the Federal Housing Finance Agency, urging reform for the treatment of consumers with credit report disputes. They believe lenders who reject applicants because they don’t want to manually underwrite the loan are in violation of the Equal Credit Opportunity Act (ECOA) and other consumer laws. Despite the frustration and complaining, nothing has been done to resolve this issue.

So What Do I Do?

Assuming you have a legitimate dispute about how an account is reporting, you can take it up directly with the creditor. Certified letters and phone calls to a creditor or debt collector may solve your problem. Just don’t dispute it with the credit bureaus.

Another option is to submit a complaint to the Consumer Financial Protection Bureau. They will send your complaint directly to the creditor/debt collector and attempt to provide a resolution.

If you have an identity theft or fraud issue, go ahead and dispute it. For anything else, don’t dispute any accounts with the credit bureaus just prior to your loan application. To be safe, be sure you do it at least 6 months prior to applying for a loan. This will give your mortgage application a much better chance for approval.

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