Open Derogatory Credit Dispute during Mortgage Loan Application

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Open Derogatory Credit Dispute during Mortgage Loan Application

Open Derogatory Credit Dispute

Open Derogatory Credit Dispute Defined

Consumer credit bureaus do make mistakes and Creditors make errors and therefore any consumer may file a dispute and if it is not removed it is reported as a derogatory credit dispute.  Consumers have the right to dispute what has been reported,  if a dispute is not resolved it becomes an open credit dispute. My Team of people are committed to assisting our clients and new friends towards their goal of home ownership and what may seem small when a disputes are made by the consumer can slow or even put a halt on qualifying for a new mortgage.  According to FHA Guidelines derogatory disputed credit accounts are defined as follows:

  • Disputed charge-off accounts
  • Disputed collection accounts
  • Disputed accounts with late payments in the last 24 months

If a consumer has a cumulative/total outstanding balance of all disputed derogatory accounts that is greater than $1,000, their file must be downgraded to a manual underwrite.  What this means in terms to the every day consumer is this.  Lenders utilize automated desktop underwriting (AUS), once a complete file is presented AUS can determine if the file can be approved or any conditions to close the loan.  The mode of underwriting preference is to be able to use AUS, for not only the sake of time to reach closing but also when using Manual Underwriting the allowable Debt to Income Ratio drops significantly.  For example the back end allowable when AUS is used is 55.6%, with a manual underwrite the allowable can be lower than 50% depending on lender and variables, such as FICO Scores, if FICO scores are below 620 then the allowable DTI is 43%.  It seems when you have a consumer with many credit disputes, often you have a borrower with lower FICO scores.

Open Derogatory Credit Dispute and Letter of Explanation

When open credit dispute (s) accounts are encountered in the borrower’s credit analysis, the borrower must provide a letter of explanation and documentation supporting basis of dispute for any derogatory open credit dispute.  The documentation but be consistent with other credit items in the borrower’s file.

Exempt Open Derogatory Credit Dispute (s)

Is it acceptable to have any open derogatory Credit dispute (s) and qualify for a new mortgage loan?  The short answer here is yes, but the guidelines are very specific and strict.  The following derogatory credit dispute (s) are allowed:

  • Disputed medical accounts are excluded and do not require an explanation provided the amount does not exceed $1,000.  If a disputed medical account exceeds $1000 a Letter of explanation will be required.
  • Disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use are also excluded from the $1,000 limit. However, the file must be documented with a credit report, a letter from the creditor, or other appropriate documentation to support dispute – e.g., police report disputing the fraudulent charges.
  • Disputed derogatory credit accounts of a nonpurchasing spouse in Community Property States are excluded.

Nonderogatory disputed accounts are excluded from the $1,000 cumulative total and manual downgrade provided the following conditions apply.  Nonderogatory disputed accounts include the following:

  • Disputed accounts with zero balance
  • Disputed accounts with late payments aged 24 months or greater
  • Disputed accounts that are current and paid as agreed

Open Derogatory Credit Dispute (s)

Recently one of my clients was qualifying for a home valued well over half a million dollars.  He and his wife have very good income, and they were able to provide at least 20% down payment towards their new home from the sell of their existing home.  All things looked good but like many of us, there were life situations in their past and in previous years they had derogatory reports on his consumer credit report for what would seem small amounts considering they were purchasing a half a million dollar home.  He knew the collections were incorrect and disputed the amounts totaling less than $2,000.00 for all of the 5 disputes.  The mortgage application came to a stop and was not considered a complete file knowing there were open derogatory credit disputes on his consumer credit report as reported by at least one of the big three credit reporting bureaus, TransUnion, Experian, or Equifax.  After reviewing these credit disputes I found most of them were aged, some of them were zero balance and were exempt.  Only one of the open disputes was not exempt, because it did not comply with the above guidelines to qualify as exempt.  For this file to move forward, retracting the open derogatory dispute had to happen but then it resets and would impact his FICO credit scores, so the best option was to pay the amount and get the creditor to completely remove the profile from his consumer credit report.  The point I am trying to make is if you are planning on qualifying for a mortgage in the near future, know what is on your credit report.  You can pull your credit report for free once a year from or and review your file. If there are errors or you would like to dispute any of the credit reports then consult with a Lender to find out if the dispute would impact you qualifying for a new mortgage.  There are also many credible credit repair companies and credit repair does work.  The Larry Stepp Team at Gustan Cho Associates have can provide resources and direct you towards credible professionals.  My Team is available 7 days a week, holidays and weekends.

The information contained on website is for informational purposes only and is not an advertisement for products offered by Loan Cabin or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates and do not reflect the policy of GCA, its officers, subsidiaries, parent, or affiliates.

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