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.
- 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.
- If the trade line does not belong to the borrower, or the reported payment history is inaccurate, no further action is necessary.
- 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.
- 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.Questions? Contact David Krushinsky Today!