Mortgage underwriting can feel like itâ€™s taking a lifetime when itâ€™s standing between you and your dream home. But your lender wants to make sure that youâ€™ll be able to repay the loan, so theyâ€™ll take the time to go over your credit history with a proverbial magnifying glass.
Before you get to underwriting, youâ€™ll want to make sure youâ€™re a creditworthy borrower. This means maintaining a good payment history, paying down debt and disputing any errors on your credit report.
However, credit report disputes can impact your ability to get a mortgage if theyâ€™re still pending when youâ€™re applying for a loan. This guide will explain how and why.
One of the first things lenders look at is your credit report, which provides information about your credit history. It details whether youâ€™ve made on-time payments on credit cards, loans and other accounts.
The information included in this report is summed up by a credit score that generally ranges between 300 and 850. The higher your score, the more creditworthy you are perceived to be.
Although credit scores arenâ€™t the only factor that determines whether youâ€™ll qualify for a mortgage, your credit score heavily influences the mortgage interest rate you receive. The highest scores qualify borrowers for the best mortgage rates.
Before you begin the homebuying process, itâ€™s smart to review your credit report and have a copy handy. You can request a free credit report once a year from each of the three major credit reporting bureaus, Equifax, Experian and TransUnion, at AnnualCreditReport.com.
Itâ€™s critical to arm yourself with this information in advance. That gives you the opportunity to dispute any inaccuracies youâ€™ve discovered and clean up your report.
Credit report inaccuracies are relatively common. Inaccurate information can happen for a variety of reasons â€” a credit card payment being applied to the wrong account or duplicate accounts in your report giving the impression that you carry more debt than you actually do, for example.
Not only can errors harm your credit score, but they can prevent you from qualifying for a new credit account, such as an auto or home loan. Thatâ€™s why itâ€™s important to regularly keep track of the information found in your credit reports.
When you review your credit report and find an error, you have the opportunity to formally dispute it under the Fair Credit Reporting Act This is the first step to take to get the error corrected or removed.
Fortunately, itâ€™s easier than ever to file a credit dispute with all three credit reporting agencies online.
If youâ€™ve found an error on your credit report, take the following steps to dispute it:
Youâ€™ll also want to reach out to the creditor that is reporting inaccurate information to the credit bureaus. Let them know youâ€™re disputing the information and provide them the same documentation youâ€™re giving to the bureaus.
In many cases, the credit bureaus investigate disputes within 30 days, according to myFICO.com.
However, many disputes can go unresolved for long periods of time, which can be troublesome for consumers applying for a mortgage. Many loan applicants donâ€™t realize an open credit report dispute can raise a red flag to lenders and may even prevent mortgage approval.
Youâ€™ll want to file a dispute as soon as you spot an error on any of your credit reports, but if youâ€™re thinking about buying a home in the near future, itâ€™s best to exercise caution when filing disputes, especially right before you apply for a mortgage.
Although the dispute investigation can wrap up in 30 days, it could last as long as 90 days, so itâ€™s best to avoid filing new disputes a few months prior to starting the homebuying process.
When a dispute is filed, credit reporting agencies are required to label the item as â€śin dispute.â€ť The dispute itself doesnâ€™t impact your FICO Score. However, your score may temporarily deflate or inflate while the disputed items are being investigated.
Mortgage lenders know credit reports with disputed items donâ€™t paint the most accurate picture of a consumerâ€™s creditworthiness and many require this status be removed before approving a mortgage application. This leaves some consumers with a difficult decision to make â€” accept costly credit report errors or delay applying for a loan until disputes have been resolved.
Hereâ€™s how lenders who provide conventional and FHA loans consider credit report disputes when determining whether a consumer qualifies for a mortgage.
Both government-sponsored enterprises, Fannie Mae and Freddie Mac, have automated underwriting systems that alert lenders to existing credit report disputes. These entities donâ€™t issue loans, but buy mortgages from lenders that follow their rules.
Fannie Maeâ€™s system initially reviews all accounts on a borrowerâ€™s credit report, even those that are being disputed. If the borrower would be approved for the loan even with the account in question, the loan moves forward. But if the disputed account would push the borrower into the â€śrejectionâ€ť category, the system will direct the lender to investigate whether the dispute is valid.
Lenders using Freddie Macâ€™s system are required to confirm the accuracy of disputed accounts. The borrower would need to have the accounts corrected before the loan can move forward.
FHA-approved lenders require borrowers with disputed delinquent accounts on their credit report to provide an explanation and supporting documentation about their dispute. If the account has an outstanding balance of more than $1,000, the loan must be manually underwritten, which means the loan officer has to review the loan application and supporting documents outside of the automated system.
The loan officer goes over the paperwork included in the borrowerâ€™s file very closely to determine their risk of mortgage default and whether they qualify for the loan program that theyâ€™re applying.
Disputed medical accounts are excluded from consideration, but disputed accounts that are paid on time must be factored into the borrowerâ€™s debt-to-income ratio.
Gaining access to a new credit report with updated information is not an option for the borrower if the creditor wonâ€™t correct the information. And when a consumer files a complaint with the credit reporting agencies, the agencies will often defer to the creditor.
Just as youâ€™ve reached out to your creditor and the credit reporting bureaus to file your dispute, youâ€™ll want to take the same action to remove it. Contact the creditor directly and request that they update the account information to show that itâ€™s no longer being disputed.
You may also want to reach out to Equifax, Experian and TransUnion to request dispute removal, but keep in mind they may also reach out to the creditor who is reporting the disputed account. See the FICO website for more information about contacting each bureauâ€™s dispute department.
Dealing with an unresolved credit report dispute can turn into a consumer nightmare. Even if youâ€™ve followed best practices, you may still be unhappy with the results.
Fortunately, you can still submit a complaint to the Consumer Financial Protection Bureau. They will forward your complaint directly to the company in dispute and work to get a response from them. Another option is to seek guidance from a consumer advocate or an attorney. The National Foundation for Credit Counseling may be a helpful place to start.
Credit reports and scores have such a strong influence on lifelong financial health, so the most effective defense is to be proactive about making sure yours are in the best shape possible. Regularly monitoring your credit profile and working to fix inaccuracies before applying for a mortgage is a good game plan to prevent major problems as you embark on the homebuying process.