Imagine going through airport security. Would you rather walk through the metal detector and be on your way? Or go into a small room for a slow in-depth search of you and your luggage?
For most mortgage applications the file passes through automated underwriting. A software approval of the information provided. The file moves through underwriting for verification of the information. Then to closing with relative ease. Much like the majority of passengers filing through security at the airport.
However, just like the occasional passenger who left a bottle of liquid in their carry-on by mistake. Or has a hair dryer looking suspiciously like a Smith & Wesson. There are certain things that can trigger a deeper look at a mortgage file. One of the most common I encounter is when there are accounts in dispute listed on the credit report. This classification on a credit report triggers a manual underwrite in some cases because it voids the automated underwriting approval. The reason is because disputing negative accounts on the credit report can increase the credit scores. Resulting in a closer look at the file by the underwriter.
A manual underwrite is when the automated underwriting is tossed out and the file has to go through the full underwriting (airport security for full body cavity search). Often times it just adds more steps to the approval process by verifying more information. Although those pesky accounts in dispute may have to be paid. Barring overwhelming documentation that they are a mistake. Whereas if they were not in dispute they may not have had to be paid.
What are accounts in dispute? Accounts in dispute is a classification of accounts that have been disputed by the borrower with the credit bureaus. The account has not been resolved because the consumer and original creditor disagree on the standing of the account. Consumers should always dispute accounts on their credit reports that are incorrect. The problem is with disputing accounts that are correct.
When someone disputes an account that is correct it will likely remain on the credit report with an account status that says, “Account in Dispute.” Rather than coming off the report. When an account is in dispute it may be excluded from the FICO score. It is an attempt to circumvent the system: dispute everything whether it is correct or incorrect to increase the credit score. The mortgage industry caught on to the strategy years ago. Now it can potentially make things worse for the consumer because the dispute may have to be resolved to close on a mortgage.
The hope is that the negative account will be removed from the report completely. The problem with the strategy is that not everything comes off the credit report. A consumer can’t clear out a negative history by just disputing everything. It may work temporarily Those accurate accounts that do happen to come off will be put back on eventually. Illegitimate credit repair (promising miracles, breaking the law, temporarily manipulating the system, etc.) is a waste of money for consumers. Just keep your money and talk to your loan officer for what is best for your situation.
People spend thousands of dollars on credit repair. It may get them nowhere. Leaving accounts in dispute on their credit report. So what should consumers be doing? If the account is inaccurate, dispute it until it is off the credit report. If this fails file a complaint with the Consumer Financial Protection Agency at www.consumerfinance.gov. If the account is accurate, do not dispute it, either pay it or don’t pay it. If a consumer plans on buying a house in the next 12 months, most loan officers would like to assess the credit report before they do anything. Then they can advise them on what to do. If their credit score is high enough, my advice will likely be to leave the report as it is. You can get a mortgage with collections. It may not be that big of a deal. When it comes to collections, the damage is done when first reported. Paying the collections does not remove them from the report unless you negotiate that with the creditor. This will begin to change when the new collection reporting policies are rolled out. Paying collections does not necessarily increase the credit score unless the collection is deleted. Deletion is not the standard.
If there are other past due debts out there that have not been reported on the credit report yet, the consumer should pay those immediately. Before the debt is reported to the credit bureaus. If the debt has not been reported, there is no damage to the score. If it gets reported later it can be a big issue. Those unreported past due debts become priority debts. They can potentially knock down the score enough to no longer qualify for a mortgage. If the consumer can resolve it before it reports, they are in control of the situation. Once it reports they are left negotiating and asking for favors.
Here is the tale of two clients. Both have a few thousand dollars in collections. The collections are accurate, the debts are owed. There is nothing incorrect about the collections.
- Client 1 has done nothing with the collections, no disputing. He has not paid the debts, but his FICO score and income are enough to qualify for a mortgage. The underwriter determined that because the collections were medical she was not going to require them to be paid. It varies by circumstance on whether or not someone will have to pay collections to get approved for a mortgage.
- Client 2 had about the same amount of debt, mostly medical collections. He paid a credit repair organization over $1000 to repair his credit. All the bad debts he owed were disputed, they were not removed from his report. They were all classified as in dispute. Due to the in dispute status the mortgage file is red flagged and has to be manually underwritten instead of automated (approved by software). The mortgage was still approved because he had a high enough FICO score and had enough income, etc. The difference was that he had to pay the collections at closing in order to resolve the dispute. If the collections were not in dispute in the first place he probably would not have had to pay them as a requirement for mortgage approval. If he did not have enough money to pay the collections this would have been a problem for the client.
The impact of a disputed account on a mortgage approval will depend on:
- Type of account
- Balance amount
- Past due balance or paid/settled
- Program guidelines
- Lender overlay requirements
We want to avoid manual underwriting when possible. One way to do that is to make sure clients are not frivolously disputing accurate information on their credit report.
About the Author: Patrick Ritchie loves teaching about credit; he is the author of The Credit Road Trip and The Credit Road Map series of books. Check out his free online classes at www.CreditLiteracyProject.com.
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