A Credit Report Dispute Can Put Your Mortgage at Risk

Credit Report Issues and Mortgage Loan

At last, you have found your ideal home after searching for a long time. They have accepted your offer, and now you have been starting to imagine what you would do with the interior design, house parties, modern lighting fixtures, flowers for the garden, etc.

But, you have one problem; the financing has not yet been approved.

When the mortgage underwriting is the one that is standing in your way, it can feel like a lifetime. But, waiting for a long time has not always been the case for potential buyers.

The housing bubble before The Great Recession made buyers hungry for mortgage-backed securities.

For that reason, lending requirements were loosened, borrowing costs were reduced, and lots of investors were accepted for financial loans they could not even afford to pay.

And, when the housing industry hit bottom, many U.S. citizens got in trouble. These kinds of lending practices are somewhat predatory, which brought on the The Great Recession and economic crisis.

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (or commonly known as Dodd-Frank) became a signed legislation, which was a direct answer to The Great Recession.

This is a financial reform law included in the Consumer Financial Protection Bureau that helped consumers the ability to repay any credit transaction, and established the Qualified Mortgage Rule under TILA (Truth in Lending Act).

These new criteria come with a more extensive financial verification procedure for the purpose of mortgage loans.

This includes a much closer evaluation at the credit history of an applicant.

Why are Credit Scores Important?

Before you start the process of home buying, it is advisable to get a copy of your FICO rating and take a look at your credit history.

According to the details in your credit report, the credit rating agency will assign your FICO report. The FICO score also determines how you qualify for the Ability to Repay.

Here’s a tip for you; request a copy of your credit report every year from the AnnualCreditReport.com for free.

The mortgage loan officers do not only concern themselves with the credit scores.

A FICO credit score can also strongly affect how you secure the interest rate. Getting a high score qualifies you for the most ideal mortgage rates as well.

Make sure you obtain this information ahead of time, so you can question and fix any mistakes you might discover, just enough to clean up your credit report.

Infographic: The Perfect Mortgage Borrower - Lender411.com
Infographic: The Perfect Mortgage Borrower – Lender411.com

Understanding the Credit Report Dispute

Generally speaking, it is common to find some inaccuracies in a credit report.

A mistake can occur for different reasons such as identity theft, the same name, a clerical error and many others.

Also, an incorrect detail in your credit file can negatively affect your rating. And so, check in a regular basis what is happening in your own record.

As a consumer, you can dispute any wrong information according to the Fair Credit Reporting Act (FCRA).

The good news is, it is extremely easy now to file for a dispute with the three major credit report agencies on the internet.

However, resolving a dispute can go on for quite a long time. A dispute that is unresolved can be a hassle if you are applying for a loan.

Many lenders consider an unsettled credit report dispute as a red flag, and may cost applicants their mortgage approval.

How can an Open Credit Report Disputes Impact a Loan Application

The credit reporting firms label a dispute case as“in dispute,” but it cannot affect the FICO rating of an applicant.

What happens is, the score will be inflated temporarily while the disputed items are still being reviewed.

Loan companies understand that the credit files that are disputed do not represent the entire history information of a consumer.

But still, it can be a determining factor when it comes to the approval of a mortgage loan.

Breaking Down Your Credit Score | Infographic - An Infographic from MGIC Connects

Embedded from MGIC Connects

Fannie Mae and Freddie Mac

The Federal National Mortgage Association (FNMA or Fannie Mae) has an underwriting program, an automated Desktop Underwriter (DU) that immediately displays a “consumer disputed” message whenever a credit rating shows a delinquency report for over a month within two years of the report.

The lender checks and verifies the credit report of the borrower, and decides if they underwrite the loan manually or get a new report minus the dispute.

The Federal Home Loan Mortgage Corporation (also known as Freddie Mac) uses the same automated underwriting system.

Obtaining a report with updated details will not help the borrower unless the creditor corrects the credit information.

In case you file a complaint with the credit reporting bureaus (TransUnion, Equifax, and Experian), they usually defer payment to the creditor.

The Federal Housing Finance Agency received a letter last fall from the National Consumer Law Center.

It recommends to make changes regarding the treatment of consumers that have credit report disputes.

NCLC thinks that lenders are violating the Equal Credit Opportunity Act (ECOA), whenever they refuse applicants because they do not want to underwrite the mortgage manually.

Approved Mortgages by Federal Housing Administration

FHA will approve a loan application even with a credit report dispute, but the entire process can take a while.

A few years back, the U.S. Department of HUD (Housing and Urban Development)  checked at open disputes carefully and gave new guidelines to the lending companies in a Mortgagee Letter (ML).

The ML requires the lenders to carefully assess the risks involved with a consumer’s application.

What You Can Do If You Are Still Having Problems

A credit history dispute is a consumer’s nightmare. Even though you have followed the guidelines, you may still not get your desired results.

The good news is, you can file a complaint to the Consumer Financial Protection Bureau.

The bureau will send your complaint to the company in dispute in order to get an answer from them.

An alternative solution is to seek advice from a lawyer or to a consumer advocate. You can start with the National Foundation for Credit Counseling.

What you can do is to be proactive considering that a FICO score and credit report can have a lifelong impact on your  financial health.

The most ideal way to avoid serious problems is to monitor your credit rating and resolve any inaccuracies before you apply for a loan.

Kristina Howard

Kristina Howard - Real Estate Writer at RateTake
Kristina has worked – as writer, editor or publisher – on numerous real estate websites. Her career took her form being a Real Estate Agent to an avid writer.
Kristina Howard

Written by Kristina Howard

Kristina Howard

Kristina has worked – as writer, editor or publisher – on numerous real estate websites. Her career took her form being a Real Estate Agent to an avid writer.