Credit disputes are meant to help you. If you don’t agree with something on your credit report, you have the right to dispute it. But, did you know how home loan lenders look at these disputes? It might be shocking to find out what they think.
Credit Disputes are Bad News
Mortgage lenders don’t like credit disputes. It’s that simple. They do have 2 exceptions to the rule, though:
- Medical debts that you dispute
- Accounts that don’t belong to you due to theft or fraud
Any accounts that do belong to you, but that you dispute could negatively affect your chances of getting a mortgage. A lender looks at it as a potential debt that will affect your ability to repay your mortgage.
What is a Credit Dispute?
Let’s look at the definition of a credit dispute. When you write to the credit bureaus claiming an error, it’s a dispute. It could be a late payment, charge off, or collection account. In short, it’s something you don’t agree with but that reports about you.
Once you file a dispute, the credit bureaus must follow through. They have 30 days to get the proof that either you or the creditor are right. Technically, if the credit bureau doesn’t receive any proof from the creditor within 30 days, the debt should be removed from the credit report.
While you dispute the account, the negative impact it has on your credit score is removed. This is only temporary, though. If the credit bureau receives proof that your dispute is incorrect, they’ll let the issue negatively affect the credit score again.
Why Do Lenders Dislike Disputes?
Mortgage lenders have several reasons for disliking a dispute on your credit report:
- The credit score reported isn’t an accurate score. Because the disputed accounts aren’t included in the credit score, the lender can’t use that score. They immediately put a stop to your mortgage application until the dispute is removed.
- Lenders don’t have a true picture of your credit history. They can include the disputed accounts and get a negative feeling for your application. But, what if it’s wrong? Maybe someone stole your identity. Then you are denied a mortgage for reasons that don’t pertain to you. With disputes in the picture, no lender can make an accurate decision.
What Options Do You Have?
Luckily, you have options. If you are getting nowhere with the credit bureaus, consider looking elsewhere for help. Most credit bureaus won’t just delete the disputed account after 30 days even without proof from the creditor. If you feel your account really is inaccurately reported, try the following:
- Contact the Consumer Financial Protection Bureau. You can file a complaint with them. They will directly contact the company you have the dispute with and help you get to the bottom of the issue.
- Contact a certified credit counselor. They may be able to help you take the steps necessary to fix your credit issues.
If you want to deal directly with the mortgage lender, prepare yourself for a lot of work. First, you’ll need a Letter of Explanation. Just like you explained to the credit bureaus, explain to the lender why you dispute the account. Along with your letter, you’ll need to provide ample proof. Make sure it’s concrete proof that the lender can believe beyond a reasonable doubt.
You may also work to pay off the disputes. If you have disputes that total more than $1,000, the lender will require you to pay them off. If the amount is more than you can afford, you can work on a compromise with the creditor. Don’t pay them anything until they provide you with proof in writing that they accept the lower amount, though. The lender will require them to report it to the credit agency as not disputed any longer.
If your disputed account is less than $1,000 in total, you can ask the creditor to change the status of the account for you. The lender doesn’t require you to pay this amount off. However, you’ll need a willing creditor that will change the status without payment.
Verifying Your Assets
Before you go and pay off the account to change the status, make sure the lender verifies your assets. You can’t just use any money, such as money your mom gave you. The lender will need to source the income to make sure it’s your money. They will also verify the source of any money you use to put down on the home.
The best rule of thumb is to keep a paper trail of everything. This way there are no hiccups when it comes to closing your mortgage loan. Lenders want to know where all monies originate and where you pay them. Getting receipts of every transaction whether you receive or pay can help lenders keep track of your money.
The Bottom Line
Credit disputes are often the nail in the coffin of a mortgage application. If you know you have an active dispute, work on fixing it before you apply for a mortgage. If you do apply and forget about a dispute, be ready to explain it ten times over.
Most mortgage companies will flat out deny the application.
If you are lucky enough to get your loan through, be prepared to make amends. Whether you have to push the company to get your dispute settled or you have to pay it. One way or the other, the lender will have their way. They can’t take a risk of giving a mortgage to someone that may or may not be able to afford the loan.