After months of searching through listings, you’ve finally found your dream home. Your offer has been accepted and you’ve started daydreaming about future dinner parties, contemporary light fixtures, and planting a backyard herb garden. Just one problem — the financing hasn’t been approved.
The mortgage underwriting process can seemingly last a lifetime when it’s standing between you and your dream home. However, the timeline hasn’t always been such a nail-biter for prospective homebuyers.
The housing bubble leading up to The Great Recession created a hunger from investors for mortgage-backed securities. As a result, borrowing costs were lowered, lending standards were loosened, and many homebuyers were approved for loans they couldn't afford. When the housing market collapsed, many Americans were in trouble. These predatory lending practices contributed to both the financial crisis and The Great Recession.
A direct response to The Great Recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act or “Dodd-Frank” was signed into law in 2010. This financial reform legislation included the creation of the Consumer Financial Protection Bureau who established the Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act.
These new standards include a much more comprehensive financial verification process for mortgages including a closer look at an applicant’s credit history.
Why Do Credit Scores Matter?
Before you begin the home buying process, it’s smart to review your credit report and have a copy of your FICO score handy. Your FICO score is assigned by the credit reporting agencies based on the information within your credit report. A FICO score also factors into your Ability to Repay qualifications.
Tip: You can request a free credit report once a year from AnnualCreditReport.com.
Credit scores aren’t the only thing mortgage loan officers worry about, but a FICO score can heavily influence the interest rate you are able to secure. The highest scores qualify consumers for the best possible mortgage rates.
It’s critical to arm yourself with this information in advance. Plus, it gives you the opportunity to dispute any inaccuracies you’ve discovered and clean up your report.
What is a Credit Report Dispute?
Credit report inaccuracies are relatively common. Inaccurate information can happen for a variety of reasons — a clerical error, a shared name, or even identity theft. And inaccurate information in your credit report can harm your score. That’s why it’s important to regularly keep track of what’s happening.
Under the Fair Credit Reporting Act (FCRA), consumers have the right to dispute inaccurate information. Fortunately, it’s easier than ever to file a dispute with all three credit reporting agencies online.
The problem is, many disputes can go unresolved for long periods of time. An unresolved dispute can be particularly troublesome for consumers applying for a mortgage. Many applicants don’t realize an open credit report dispute can raise a red flag to lenders, and may even prevent mortgage approval.
How Open Credit Report Disputes Hurt a Mortgage Application
If open credit report disputes are relatively common, how can they hurt a mortgage application?
When a dispute is filed, credit reporting agencies are required to label the item as “in dispute.” An item being actively disputed can not harm your FICO score. In fact, your score will be temporarily inflated while harmful items are being investigated.
Lenders know credit reports with disputed items are not the most accurate picture of a consumer’s history and many require for this status to be removed before approving a mortgage application. This leaves some consumers with a difficult decision to make — accept costly credit report errors or delay applying for a loan until disputes have been resolved.
Fannie Mae & Freddie Mac
Fannie Mae’s automated underwriting system, Desktop Underwriter (DU), automatically issues the warning message “consumer disputed” when a credit report reveals a 30-day or more delinquency reported within 2 years of the inquiry. The lender must confirm the accuracy and completeness of the borrower’s credit report by obtaining a new report without the dispute or manually underwrite the loan.
Loan Prospector, Freddie Mac’s automated underwriting system, follows a similar process. Gaining access to a new credit report with updated information is not an option for the borrower if the creditor won’t correct the information. And when a consumer files a complaint with the credit reporting agencies (TransUnion, Equifax, and Experian), the agencies will often defer to the creditor.
Last fall, the National Consumer Law Center wrote a letter to the Federal Housing Finance Agency, urging reform for the treatment of consumers with credit report disputes. They believe lenders who reject applicants because they don’t want to manually underwrite the loan are in violation of the Equal Credit Opportunity Act (ECOA).
FHA Approved Mortgages
FHA approved mortgages will approve an application with a disputed credit report, however, the process may still be time consuming.
A couple of years ago, the U.S. Department of Housing and Urban Development decided to look more closely at open disputes and provided new instructions for lenders in a Mortgagee Letter (ML). This ML addresses both derogatory and non-derogatory disputes and requires lenders to more carefully evaluate the risk associated with a consumer.
What To Do if You’re Still Struggling
Dealing with an unresolved credit report dispute can turn into a consumer nightmare. Even if you’ve followed best practices, like submitting credit report disputes both in writing and online, 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.
Because a credit report and FICO score have such a strong influence on lifelong financial health, the best defense is to be proactive. Regularly monitoring your credit report and working to fix inaccuracies before applying for a mortgage is the best way to prevent major problems.
Goldman Sachs Bank USA High-yield 12 Month CD
Ally Bank High Yield 12-Month CD
Synchrony Bank High Yield Savings
Barclays Online Savings Account
* All banks listed are a Member FDIC.