Wednesday, April 7, 2010

Disputing Credit Report Errors Can Prevent You from Qualifying for a Loan!

Thinking of disputing an account on your credit report? Better think twice!

Everyone is allowed to dispute inaccurate information on their credit report. If you send a letter to the three credit bureau (Experian, TransUnion, and Equifax), they are obligated to pursue the matter for you. If the creditor (the company whose information you are disputing) does not reply within 30 days, the information you are disputing gets removed from your credit report. So far, so good.

Here's the problem. Many "credit repair" companies and individuals are disputing legitimate derogatory information, in the hopes that the creditor will not respond and the derogatory information will be removed from the report. Without the derogatory information, the credit scores go up. However, Fannie Mae and Freddie Mac (the companies that buy most loans from lenders after the closing) are on to this scheme. So now, when there is a notation on a credit report that an account has been disputed, Fannie and Freddie are often exercising the option of downgrading the loan application and are imposing lower debt-to-income (DTI) ratios on the borrower. Instead of being able to borrow 45% of your gross income to pay for your house and other debts, you will be limited to a maximum DTI of 38%. That is a huge difference and will prevent many people from qualifying for a mortgage.

So what should you do?

Don't listen to anyone who tells you they will "repair" your credit. They will most likely dispute every derogatory account on your report (even the legitimate ones) and your DTI ratio will be lowered by Fannie and Freddie. They will also charge you lots of money for doing something that you can do by yourself, but that is an entirely different issue.

The most important thing to do is use a lender who stays current on the changes in the lending industry. Most lenders do not. The best way to tell if they know what they're doing is to ask them how to find the Fannie Mae underwriting guidelines. If they aren't able to tell you, they are obviously not reading them. Here's the link to the guidelines - use it to test your lender - it's great fun!

http://www.allregs.com/tpl/public/fnma_freesiteconv_tll.aspx

If you have an error on your credit report, don't dispute it until after you close on your loan. Many times, the error will not affect your ability to qualify for the loan. If it does need to be corrected before qualifying for the loan, any competent lender will be able to do it for you without having it show up on the report as being a disputed account. If they don't know how to do that, find another lender who does know how to do it.

1 comment:

Chris and Debbie Thomas said...

Ask your mortgage broker to ask the underwriter if a letter of explanation will be sufficient. The underwriter's job is to approve loans, not deny them. I have never heard of an underwriter not accepting a reasonable explanation. If your mortgage broker does not want to ask the underwriter, ask to speak to his boss. This is an easy problem to solve.