Credit Report Disputes Could Derail Your Loan Approval

Some consumers with exceptional credit reports and high FICO scores are being denied mortgages by Fannie Mae’s automated underwriting system because there is a notation in the credit report that the consumer has disputed an item.

Picture this scenario: You’ve got outstanding credit scores close to 800 and solid equity in your home. All you want is to refinance your mortgage to take advantage of today’s rock-bottom interest rates.

Your application should breeze through your lender’s system and get you a great rate. But at the last moment, your lender says: Sorry, we can’t do your loan. Fannie Mae’s automated underwriting system won’t accept any application where there is a notation in the credit report that a consumer has disputed an account.

You then must write to explain that the dispute, over, for instance, a medical bill or a credit card charge, was valid. The account was closed. The creditor promised to remove the dispute notation but apparently didn’t.

Your loan officer won’t budge. Policy is policy, he says. Your refinance application is denied.

How did this happenn to you?  Under the Fair Credit Reporting Act, consumers are guaranteed the right to dispute inaccurate information on any account in their credit files.  Once a consumer disputes an item in their credit report, a notation to this effect is made in the file.  Until the notation is removed, most credit-scoring system generally will not factor the disputed item into the computation of the consumer’s score.

However, with the recent surge in companies claiming to “clean up” and “erase” blemishes on consumers’ credit reports, some lenders are finding that these credit companies are disputing accurate, but negative items, hoping the consumer will qualify for a loan before the dispute is resolved.

Applications that are denied through Fannie Mae’s automated underwriting system, which is used by virtually all lenders doing business with Fannie Mae, are sent back to the lender for manual underwriting.  It is then up to the lender to determine and document whether the disputed information is accurate and underwrite the borrower’s credit accordingly.

Why are Fannie and Freddie so stringent about underwriting policies on applications with disputed accounts? Mainly because credit repair companies have been tricking automated systems tied to credit scores by disputing accurate but negative items. When accounts in a consumer’s files contain a “disputed” notation, most scoring software ignores them for the purposes of computing the score.

A seriously delinquent account that could legitimately depress a FICO score might be taken out of the equation — at least temporarily — if a “consumer disputed” notation is in the file. Fannie and Freddie are trying to protect themselves from fraud.

What do do now, in order to avoid this credit nightmare happening to you?

* Review your credit report. You can’t know where you are going until you know where you are. Call our offices to get a free credit report, and look it over for accuracy.  Steve Eckhoff, our Financial Team Specialist, will be happy to confidentially discuss any questions you may have about your credit report.

First, make sure that the information in your file is about you and only you, not someone who has a similar name or a similar Social Security number. Next, look for items about you that are simply erroneous.

If you find mistakes, dispute them. If you discover old debts that haven’t been paid off, satisfy them as soon as you can.

Beware of credit-repair scams. By all means, don’t pay someone to wipe away the negative items in your file. If they don’t follow through, the damaging items will reappear in two or three months.