Should you tell your clients to dispute items on their credit report during the loan process? The most common response is typically, "Sure, why not?". If you are advising your clients to dispute credit items, you may be in for a big surprise.
A few months ago, we prequalified a borrower looking to purchase an investment property. We knew the transaction wasn't going to be easy, but luckily she had come to us before she began looking for a home. After pulling her credit report, we discovered her FICO score was low; however, it still fell within the acceptable range to qualify for conventional financing. After analyzing the credit accounts, it was apparent that a collection account placed on her credit report by a fitness club was driving down her FICO score. We reviewed the credit report with the borrower and she did not feel responsible for this collection account. Our recommendation was to dispute the account with the credit bureaus, which she did.
Fast forward two months. She finds the perfect property and her contract is accepted. We updated all of her information and sent the file to be underwritten. The underwriter "suspends" the loan and conditions for the following inforamtion: the disputed account on the credit report must not be shown in dispute; or provide documentation the account does not belong to the borrower; or provide Freddie Mac Loan Prospector (LP) Automated Underwriting Findings. We cross-reference the guidelines and sure enough, the underwriter is correct. Here is an excerpt from our underwriting guidelines, which refers to Fannie Mae's Desktop Underwriting (DU) policy:
DU findings may often times note different accounts reported as Disputed. These accounts are not considered in the credit risk assessment provided in the DU feedback and as such, need to be dealt with exactly as noted in the DU findings.
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The lender must verify the accuracy of the trade line(s) by determining if it belongs to the borrower and by confirming the accuracy of the payment history.
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If the trade line does not belong to the borrower, or the reported payment history is inaccurate, no further action is necessary.
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If the trade line does belong to the borrower and the reported payment history is accurate, it must be taken into consideration in the credit risk assessment. A new credit report must be obtained with the trade line no longer reported as disputed and resubmit the loan case file to DU with the new credit report.
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If the disputed trade line is a mortgage that was past due by two or more payments in the last 12 months, or a foreclosure that has been filed within the last 5 years, the loan is ineligible.
Ok, no big deal.... we'll run the loan through Freddie Mac Loan Prospector and obtain LP findings. The problem is that sometimes LP does not accept loans that DU will accept and vice versa. LP would not "accept" this loan. So we immediately contact the borrower to see if she has received any updates from the credit bureaus since disputing this item. Big surprise, she has not. We all know how long this process can take. We explain the situation to her and she unhappily decides to pay the collection company in order to get the loan completed. We order a re-score from the credit company with the proof provided to us that the collection is paid in full in order to get the account out of dispute status. We're on our way.
Fast forward 5 business days. Everyone is eagerly anticipating receipt of the re-score, as this is our last condition before we can obtain a full approval and order closing docs. I forgot to mention that this transaction was an "approved" short sale and we only had 17 days to close. We receive an update that the credit re-score has been completed. We pull a new credit report and the account is still showing in dispute????!!?!? Apparently, TransUnion called the collection company, but no one answered the phone. The report was never updated by TransUnion. Meanwhile, the clock is ticking and everyone is trying to find out if we're going to be able to close before the short sale approval expires. We have no choice but to order a new re-score. We send in our request and wait another 5 days business days. The short sale approval has now expired and we're still two weeks away from closing.
Finally, we receive the second re-score back and everything looks good. We send all of the updated information into underwriting and the file gets cleared for closing. Thankfully, the short sale approval gets extended. The borrower signs papers and every one lives happily ever after. The moral of the story is when you're purchasing or refinancing your home; be careful when disputing tradelines on your credit report, even if they aren't your accounts. If you have additional questions, contact David Krushinsky at 602-695-7575 or david@dkhomeloans.com.
David, Thanks for the details. I've run into similar things in the past, but we thought we had it all ironed out before we made an offer, wrong. My client had 4 credit scores, 3 excellent and one below 500. The low one was not him, but a similar name from another state. The wife had been working directly with the bureaus to resolve it, and was told it was done when we started. It took about 2 weeks of extensions and putting them up in a Residence Inn before it finally was resolved and we were able to close. The lesson I learned was get it 100% resolved in writing and don't take the client or even the credit bureau's word for it.
Is it wise to even mess with your credit at all during an approval period?
A good friend of mine just bought his first primary home and the mortgage broker told him to NOT pay off some of his collections because it will re-birth the debt so to speak. Instead, he was urged to NOT open any credit lines and obviously not miss any current payments. After reading your post here I wonder what the benefits would have been if he did pay off those debts which he had the finances too and then ordered a re-score.
My assumption would have been a better rate/terms on his loan. Your thoughts?
Often consumers think that they are fine if they just dispute. Many of the so called "credit repair" companies routinely dispute all negatives on a credit and the consumers thinks they're home free. Not so fast.
My advice to folks with credit dings is pay first, then dispute privately with the vendor and the credit reporting company, AFTER SETTLEMENT.
Not fair, but it seeks to thwart the credit repair scams.
Dan - You're right. With the restrictions we have in today's credit markets, it only makes sense to get the credit report in order before moving forward. Unfortunately, sometimes you don't know what you don't know.
Nick - It depends on the specific situation if you should mess with your credit report. If you have collections, like the case you mention, I would agree that it isn't wise to do anything. Many borrowers are very marginal and some transactions take more than 120 days to complete. Once a report is older than 120 days a new credit report will need to be pulled. If the score falls below the minimum score required, the deal will blow up. Often, once you pay off an old collection, the credit bureaus scoring model factors it in as a newer collection. In effect, the collection appears to be new so the borrowers score takes a hit.
Len - You're a seasoned pro and I usually always agree with your advice.
Great info..thanks
Sometimes it is so hard to even pay the collection company and get proof that it is paid.
Hi David -- This post underscores the importance of hiring a knowledgeable loan officer.
David, I am dealing with a similar issue right now. What was a bit frustrating that the 10 accounts my client disputed all had zero balances. Based on conversations I've had with underwriting their hands are tied with both LP and DU as long as an account is labeled "account in dispute". This is a client that I've been working with for about 8 months while they shopped for a new home and at no point did she have credit that I couldn't work with. The new credit was pulled because some of the paperwork I had expired. The reason she disputed the accounts was because a credit repair company had solicited her and she didn't think to mention it to me. Anyway, we've been able to remove most of these disputes from Equifax and Experian, Trans Union is a little tricky but we're getting it done. After this, I think I may be adding a new item on my Do's and Don'ts list handed out to clients during the approval process. Jason
Oh boy . . . that sounds like a tough one. Thanks for sharing your experience. You aren't going to buy those Ugg boots (above), are you? LOL
if you pull credit and the score is acceptable, don't do anything.
i believe the FHA guideline in regards to disputed accounts is that all these files must be manually underwritten. that should slow things down a bit.
What a night..................mare!
This is a new wrinkle, but makes sense. It goes along with - "Don't do anything until the loan closes" including major purchases, opening a new credit card, making any late payments, not paying anything at all. If the score is good enough to get the loan, leave well enough alone until after settlement. Then, take Lenn's advice. Very informative post, thanks so much!
Glad you were able to get this deal together. Congrat's
David, your last sentence:
Often, once you pay off an old collection, the credit bureaus scoring model factors it in as a newer collection. In effect, the collection appears to be new so the borrowers score takes a hit.
is what I think he was referring to so that makes sense. He was eventually able to get an FHA loan and purchased a home in QC. Thanks for the great post!
Hi David ...
If I can help your "credit score challenged" clients, please let me know.
Our company has been in business for over 10 years, 125,000+ clients, and more than 5 million line deletions on credit reports, and we have NEVER LOST A SINGLE CASE. This is not credit repair or credit fixing. We use the law (Fair Credit Reporting Act - Section 609) to force the bureaus into compliance.
Section 609 states clearly, that the bureaus can NOT release credit information to third parties without "verifiable proof of the debt in their repositories". They have NEVER had this proof. The bureas have been operating outside the law since 1971, when the Act was enacted. We have never been shown one single source document that is required by law for the bureaus to have. Our system attacks with this portion of the law only. It's all that is needed to force deletions on the reports. Thus, bringing you a client you would otherwise have to turn away. Who wants THAT?
Let me know if I can be of any help in answering your questions or concerns. Thanks!
Bob Stephens www.RealizeGreatCredit.com (360)708-8511
I have clients right now in this kind of situation, and we told them to, basically, suck it up, pay now, and dispute later if you feel it's necessary.
Wow, good information! Glad you were able to keep this one together!
David - WOW! Can I ever relate! This is why I emphatically stress with my clients that we make sure that any credit issues are dealt with before we get into escrow. These days, escrows are hard enough already without bringing even more issues into the mix. So glad to hear that everything worked out ok in the end though.
David:
This is very enlightening and does revisit the issue of leaving your credit alone until your loan has closed.
I agree that disputing items can be self defeating in the short term. Similarly, Fannie Mae will not accept credit reports with disputes on them.
Gary - Thanks for the nice comment.
Russ - You're right! It is usually difficult to get proof an item is paid from the collection company. Unless they're trying to get something from you, good luck getting response.
Chris - You're absolutely right. People who don't educate themselves will not make it through this down-cycle.
After this, I think I may be adding a new item on my Do's and Don'ts list handed out to clients during the approval process.
Jason - I actually recommended this to another member in their blog post. He said, which I agree with, you can't write a list for everything "not"to do or it would be a mile long. Thanks for the heads up on LP too. This loan was underwritten a few weeks ago. Freddie typically always follows suit.
Melissa - I already signed up for the Ugg boots. They looked to comfortable to pass on.
Jay - Having files manually underwritten isn't in anyone's best interest. You're right, it's better to leave the credit alone if the borrower qualifies.
Jackie - I have been wondering when I am going to wake up from this nightmare we're in everyday. Unfortunately, all the files seem to have one minor problem that risk blowing the deal up. LOL
Frank & Sharon - I agree 100%.
Lorraine & Loretta - Thank you!
Nick - Thanks again for your comments.
Bob - Thanks for your insight about the credit laws. You would think the government owns the bureaus. :)
Aaron - That kind of sucks for them but you're right on.
Melissa - Thank you!
Donne - It's always so nice to hear from you! The escrows are really tough these days.
Claudette - Thank you!
Paul - Did you mean Freddie Mac?
If you have a balance on your credit report and you need to remove it from credit report in order to close your deal; this is what you need to do. Negotiate to pay it off, by lump sum or a payment plan if a large amount. Deal with original creditor, not the collection agency or another third party. Always get something in writing stating that you will pay this debt for the agreed amount with the understanding that they will remove it from your credit report on all three bureaus.
If you have any other clients that need help with their credit ask them to call me. I will a free evaluation of their credit without any obligation. If they enter our program we could have them qualified in six months or less. Our programs last a maximum of six months. Let RCS Credit Solutions bring these clients back into your pipeline.
OUCH! I knew this would catch up eventually. Thanks for the insider info!
David - I typically don't get involved in the mortgage process, but this is great information to know.
David, great post with critical credit advice. Nothing better than the voice of experience...
Sidebar: To me, the term Suspend more than to dispute or not to dispute a collection that isn't mine and pay it anyway is craziness. My gut reaction to a suspense is approve it or deny it but don't suspend a loan in la-la land. Nothing makes me crazier. Kate
Hi David - VERY intriguing! My first thought would be to tell the borrower, as mentioned, to dispute the wrongful claim. Who would have thought it would have turned in to such a fiasco! Thank you so much for the alert and the education, and best of luck to you!
Luis - Thanks for your help! That's great advice.
Kate - It's more common these days to get a loan suspended rather than a denial. The "suspension" only means they don't have enough information to approve it. A denial requires resubmission, which could really slow everything down due to the new MDIA guidelines. It would also create issues for an FHA loan if the borrower got denied. Suspension sounds harsh but it's not a big deal.
I have just run into this situation myself. I have an FHA purchase, the borrower has an unsatisfied judgment on her credit report (it is not being reported as disputed). My borrower was not aware of nor did sheknow what the judgment is for so she inquired about it and was able to provide the documentation to the creditor to have it vacated. We informed our uw that the borrower would not be paying the judgment as originally thought and provided the letter from attorney confirming that the judgment was being vacated. Because we disclosed the fact that the judgment was in dispute rather than just provide the letter showing judgment was to be satisfied we now have to downgrade to a manual uw (which the loan doesn't qualify for). The only other option is to wait for the Order from the Judge (which will take over 2 weeks to obtain) and order the rapid re-score.. The loan was originally supposed to close today!! We did get a small extension but I am not sure if it will be long enough.
I am still trying to locate the published information in 4155 that specifies this is the case but am not able to find it. I get very frustrated when surprises like this come up!! With all of the constant changes occurring it is difficult to stay on top of all of them. Unfortunately this means that the consumer is the one who suffers.
WOW, who would have thought!! I will need to make sure my lender reads this post. We can all learn by example.
So many things can go wrong! Wow! Thank you for sharing your experience!
A client's good credit should be restored before the loan process starts. We have found that credit fixing and repairing does not work. At best, it's temporary and restricted. Section 609 & 611 of The Fair Credit Reporting Act of 1971 states that if the credit bureaus do not have verifiable proof documents at the repository, they must PERMANENTLY remove ALL derogatories on the credit report. ALL DEROGATORIES, not just the line items that do not belong to the credit holder. THEY DON'T HAVE THESE DOCUMENTS AND HAVE NEVER HAD THEM! Credit Bureaus have been operating outside the law for 39 years. We feel that is not fair. Invoking Section 609 on the credit bureaus is a legal process that works. This is not a "quick fix" and it is not credit repair. Here's Proof: www.RealizeGreatCredit.com
Good advice. Be careful about paying old collections. I have seen scores drop. If a collection account is required by the lender to be paid I usually try and wait until closing.
Wow...good advice. I never would have thought this would have an impact.