How A Disputed Item On Your Credit Report Can Screw Up Your Home Loan

Thanks to federal regulations, when you dispute an account on your credit report and the dispute is resolved in your favor, the credit reporting agency is required to remove or correct the account. Credit reporting agencies often don’t do this, though, and the Washington Post notes that it can come back and interfere with your next home loan application.

If you have a disputed account on your credit report, both Fannie Mae and Freddie Mac will automatically kick your application back to your bank for manual underwriting. If your bank really wants that loan, they’ll underwrite it themselves before sending it back upstream. But if they can’t or don’t want to do that, they’ll just reject your application and blame it on Fannie or Freddie.

Before you buy or refinance a home, pull copies of your credit report and clean it up if necessary. If you see any disputes that were resolved in your favor but that you can’t get the bureau(s) to remove, look for a lender that will offer in-house underwriting.

“Old credit disputes can scuttle loan” [Washington Post]
(Photo: me’nthedogs)

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  1. FDCPAGuy says:

    There are two ways around this. FNMA and FHLMC allow the loan to continue on automated underwriting if the lender can confirm it’s a valid dispute. So if you can support your claim that something is not yours or erroneous it won’t be an issue. Also a lender can try to use a rapid rescore to remove the aging dispute code.

    • FDCPAGuy says:

      @FDCPAGuy:
      Oh also FHLMC’s automated underwriting (Loan Prospector) doesn’t auto kick back loans like FNMA. FHLMC has a threshold on the number of disputer accounts they will allow.

    • FDCPAGuy says:

      @FDCPAGuy:
      Oh and to add the article makes it sound like proving a dispute is valid won’t work but they don’t have access to FNMA DU findings like I do :)

      • Chris Walters says:

        @FDCPAGuy: Thank you for these tips!

        • FDCPAGuy says:

          @Chris Walters:
          Just incase anyone wants the official FNMA breakdown on disputed tradelines (bottom of page 6). You’ll also see where I was right with the work arounds and the article was wrong. I wonder if someone should tell the paper ;)
          [www.efanniemae.com]

          Disputed Credit Report Tradelines
          With DU Version 7.1 loan casefiles, lenders will be required to confirm the accuracy of disputed tradelines reported on the borrower’s credit report. If it is determined that the disputed tradeline information is accurate, lenders will need to ensure that the disputed tradelines are considered in the credit risk assessment.

          If the tradeline does not belong to the borrower, or the reported payment history is inaccurate, no further action is necessary. If the tradeline does belong to the borrower and the reported payment history is accurate, it must be taken into consideration in the credit risk assessment. To ensure it is considered, the lender may obtain a new credit report with the tradeline no longer reported as disputed and resubmit the loan casefile to DU, or the lender may manually underwrite the loan.

          • Roeroica says:

            @FDCPAGuy: How many lenders are willing to manually UW the file and what kind of pricing hits will there be for that if they are willing to?

            I hate DU.

            • FDCPAGuy says:

              @Roeroica:
              Very few lenders right now are doing MU on FNMA loans. The fear that if there is any deficiency in underwriting the loan will not be FNMA warrantable. FNMA DU is much more flexible with guidelines and small deficiencies in underwriting are less likely to kill the FNMA warrantability of a loan.

    • mcjake says:

      @FDCPAGuy: What do I do when American Express refuses to acknowledge that there is an error?

  2. Verucalise (Est.February2008) says:

    I know this sounds stupid, but I’ll say it anyway because it’s 9pm and I’m dog tired.

    If the credit bureaus find in YOUR favor… why wouldn’t they change the status of the disputed item to fix it or delete it? That blows my mind, that there is a dispute process that can find in your favor without actually fixing the problem.

    (and I very much agree… before getting a mortgage, CHECK AND FIX CREDIT to avoid this snagglepusses)

    • Stephmo says:

      @Verucalise(countingcalories): KEY WORDS:

      Credit reporting agencies often don’t do this, though, and the Washington Post notes that it can come back and interfere with your next home loan application.

      But the main reason this stuff is pulled for manual review is that this is the basic “credit repair” scam that those agencies pull. They’ll send in the dispute forms on your behalf over and over and over in hopes that the lender will fail to fill out a form and send it back within the 30 days and then that will theoretically lead to the bureau removing the reporting item.

      Only then, the legit lender is still sending over your account because, oh, you have a legitimate account and they have the right to do so. And the smarmy “repair” agency is back on the treadmill disputing your accounts.

      It’s lame and any good lender pulls an inordinate number of disputed accounts aside to make sure that you’re disputing for a real reason (i.e. you’re a Jr. and you and Sr.’s accounts are tangled beyond belief) instead of reasons akin to “I heard if you write paid in full on the memo line that’s a contract!”

      • FDCPAGuy says:

        @Stephmo:
        BTW if you are a Jr and Srs accounts are on your credit it’s most likely because you have a Mixed file with the bureau in question. You can request that they standardize your file to fix any incorrect ID variances. They will usually need a copy of your drivers license and SSN card.

        But yeah the scummy repair companies like Lexington which shot gun dispute stuff are going to cause problems. The only ‘safe’ thing to dispute are public record items (judgments, tax liens, etc) because the bureaus have no where to communicate to the lender or automated underwriting that these accounts are in dispute.

        • wcnghj says:

          @FDCPAGuy: No harm in disputing accounts that are legitlly(is that a word) contain inaccurate ‘stuff.’

          • FDCPAGuy says:

            @wcnghj:
            If the accounts are on the report due to a ID variance disputing individual accounts will do no good. They will come back as ‘verified’ because of the person who they belong to is also tied to your info. So no there is no harm it just won’t get you anywhere ;)

            • wcnghj says:

              @FDCPAGuy: Ah, but if you live in my state there is a special bureau that will get them to shape up :).

              (Not the AG’s office)

              @probablykate: They would have to reinsert. Not as simple as re-reporting :).

              • FDCPAGuy says:

                @wcnghj:
                Or if you’re me you can just fix it via the rapid rescore/recheck channels in a few days.

                Also I have yet to see a bureau follow the laws in regards to notification of re-insertion.

            • Verucalise (Est.February2008) says:

              @FDCPAGuy: We’ve had that problem before… my SO is the 4th in his line, and his father’s info has showed up on his report!

            • theblackdog says:

              @FDCPAGuy: Oh I’d disagree about the ID variance not doing any harm. My dad and I have very similar names. He has a Shell gas card, and I tried applying for my own. Shell looked at the credit, saw an account existed with someone with the same name match, and denied me the credit card. However, they then took my social security number from the application, and added it to my dad’s account because they thought I was him.

              Recently my dad tried to call in to change the address on his card, and he flunked the ID verification at first because of the wrong SS#. It took some major work to straighten it out, including him pointing out he got the freaking card before I was even born.

              So ID variance can make companies do stupid things.

              • FDCPAGuy says:

                @theblackdog_HalloweenHaunting:
                You need to re-read what I posted. I agree ID variances cause issues. I said disputing individual accounts which are on the report due to an ID variance will do no good. You need to go after the issue (ID variance) not the symptom (account on report).

                • theblackdog says:

                  @FDCPAGuy: Ah, it was a misread. OTOH, my dad and I have given up on trying to convince Chase that his Visa card belongs to him and not to me. They just don’t listen.

    • probablykate says:

      @Verucalise(countingcalories): Usually what happens is that the bureaus do remove it, but if the company that is reporting the incorrect information doesn’t fix the problem on their end, they re-report the incorrect information to the credit bureaus, and since the credit bureaus just show what was reported to them, there it is back on your report.

    • Verucalise (Est.February2008) says:

      @Verucalise(countingcalories): Oh stupid me, misunderstood the article. Now that it’s 9am and I’m halfway thru a pot of coffee… friggin Duh.

  3. Telekinesis123 says:

    This is why Credit agencies should provide a bi-annual report to everyone it makes money off of by selling their private information. Their business and the running of it in an irresponsible and unprofessional way can and does cost individuals massive amounts of money and they have barely any responsibility to the people they make a living of of besides the most absolute basics of legislation. Much more accountability and clarity should be in this business, you should be able to look up your credit report freely like you do your bank account, it affects your life that much and it’s the least they should do for the privilege of using your private information for profit.

    • FDCPAGuy says:

      @Telekinesis123:
      They do provide an annual report and a semi-annual report if you’re an identity theft victim. http://www.annualcreditreport.com

      • Telekinesis123 says:

        @FDCPAGuy:

        What I’m saying is it should be mailed to you free of charge without even asking, and to not receive it you have to opt out. They should have a duty to report to you not you report to them. Having readily available access that is easy for all individuals to participate in, understand, and hear about should be a part of all individuals normal financial habits. As it stands now, the whole industry is shrouded in mystery and the vast majority of people don’t know how to and are not able to effectively communicate with these companies who hold their financial well-being in their hands.

  4. mcjake says:

    As a daily consumerist reader I really should have known to do this in July when I started looking for a house and mortgage. Now, I’m weeks away from closing and an error on my credit report is screwing us over.

  5. ElizabethD says:

    Ha ha ha @ the pic. That reminds me of our dog — a beagle/pit mix. She grabs on just like that. Thanks for mixing the occasional pup in with all the cat photos.

  6. rellog321 says:

    If it is a law, and they are ignoring, I would think some smart lawyers would be going for a class action. Hitting them hard in the wallet is the only way to make them change… Personally, I think that the law should provide for a financial compensation for errors not promptly corrected. $100/day for each mistake. After a while that would add up and put a hurt on them.
    Not sure why they aren’t regulated more either… they have little to no real oversight, but can ruin peoples lives…

    • FDCPAGuy says:

      @rellog321:
      There is no law that says you can’t deny someone a loan for any reason you want :) so no you won’t be successful in suing them. If you want a loan all you can do is play the game.

      • rellog321 says:

        @FDCPAGuy: I never said sue the bank. You’re suing the credit reporting agency for INACCURATE information. Since we have no control over their practices, we should have some rights as well….

        mac-phisto…
        The article was about CRA that do not rectify known errors. So they ARE the ones that should be sued. I don’t know if the provision you supplied is good for that or not, but by making the CRA liable, they will be much more likely to keep the reports accurate.

    • mac-phisto says:

      @rellog321: there is remedy under the FACTA & FCRA for inaccurate reporting. i believe you can sue for $1000 + actual damages.

      the actual damages part is the hard part & i don’t believe unrealized future costs can be factored in. so, you could sue them for added costs in obtaining a mortgage (application fees, increased closing costs, point discounts, etc.), but if your interest rate increases, i don’t think you can argue that the loan will cost you an additional $30,000 over 30 years.

      bear in mind that the company you should be suing is the one misreporting; not the CRAs.

  7. Skaperen says:

    If there is a disputed item and the credit reporting bureaus fail to remove it within 5 business days of the resolution, then they should be fined, starting at one penny on the first day, and doubling each day, with half the fine after the first day going to the person whose account is at issue.

    • Telekinesis123 says:

      @Skaperen:

      I’m glad you think the should be more accountable but that’s pretty weaksauce, what if it causes you to not get a loan? How much is your time worth? What about the embarrassment and stress, or a loan at a much higher rate and your locked in by contract which in the end costs you thousands of dollars?

      Where would the other half go to? Surly not the govt why is it any of their business and how does it effect them 50%?

      If they’re able to make a profit and run a business of our personal (very) information they’re able to be accountable to that individual. We should get reports free of charge without asking just like we receive bank statements and I guarantee the financial health of the nations citizens that adopts this will be greatly improved…but of course you have to think who does not having these rules in force benefit.

      • phillipe says:

        @Telekinesis123:
        10 doublings = 1024, so it looks like Skarpen values his time as follows:
        15 day delay: $10.24/2=$5.12
        25 day delay: $10,485.76/2=$5,242.88
        35 day delay: $10,737,418.24/2=$5,368,709.12
        45 day delay: $1,099,511,626.76/2=$5,497,558,138.88

        • Telekinesis123 says:

          @phillipe:

          Yes for sure, I realized it was quite high after the doubling, but no edit button here on Consumerist, thanks for pointing it out. That’s definitely not weaksuace.

  8. repete7 says:

    Jeez, first you’re supposed to dispute inaccurate information on your credit report and then you get can’t get a loan because of that dispute?

    Recently, my credit report inaccurately showed that I was disputing a credit card account. I’ve never had a problem with that account and I’m not disputing anything. So, I disputed that the account was in dispute. Does that mean I can’t get a loan now?

    • Stephmo says:

      @repete7: No – if it’s inaccurate and everything happens as it should, accounts are removed and everything’s okay.

      Here’s the scenario:
      If you dispute your AMEX as inaccurate, the bureau will show that you’re disputing the account so the lender knows that you’re saying, “hey, there’s something wrong with this account.” It could be in the middle of being resolved.

      In and of itself, one account is usually not a flag.

      Now, imagine 10 of these – it could be your whole bureau, it could be 50% – either way, it’s odd.

      Let’s say you’re sure that they’re inaccurate, but either the lender hasn’t responded or they haven’t updated their feed and they’re still showing the account as it was on the bureau. It just shows disputed account on the bureau for all 10 of these accounts. The lender will pull it for manual review and could very well decline you.

      Why? Here are the reasons you may have for disputing 10 accounts:

      - You may be a victim of identity theft and you’re cleaning up old accounts (but you don’t have a statement to that effect on your bureau).
      – You may be attempting to blanket all the accounts you ever had an issue on with the disputes to get them to go away by hoping the lender fails to fill out the form within 30 days. This is a scam on your part and means you’re not so good.
      – If you’re disputing a large portion of your bureau, it may be impossible to determine your credit worthiness until the disputes are all removed/settled – after all, those accounts are being used to calculate all of your scores right now.
      – You have just decided to dispute a ton of accounts, which means you haven’t paid much attention to your credit history up until now. Not good.

      In all honesty, having actual issues that are disputable are few and far between. When I worked for a lender, we got 100s of these a day – and the disputes were mostly for things people WISHED would go away, not for things that people had found a legitimate data problem. As in 99/100 were just people hoping they could say things like, “you didn’t approve my loan, so take away your inquiry!” or, “I’ve been a good customer with multiple accounts, so I request that my 6 30 day lates be reduced to 1 as as show of good faith” kind of disputes.

  9. uber_mensch says:

    Fair Isaac needs to sleep with the fishes. Where’s Osama Bin Laden when you need him?

  10. hi says:

    I’ve been trying to clean my credit report for three years and they won’t remove their errors. I want to just give up. Credit reports are F’kin BS. I bought a car and paid it off “too quick” is what one lender told me. So this makes me a bad person to lend to.

    • Osi says:

      @hi:

      Same problem, except ive been doing this since 2001. You have to love corrupt credit reports .. Too many errors, proof of errors, still on report.

    • baristabrawl says:

      @hi: Before your loan documents are produced, you should ask if there’s an early pay-off penalty. If there is, it shows up as a ding.

      Thank you, Sallie Mae. All of our auto loans are paid off early and there are no penalties with our credit union. I love you, credit union.

    • Stephmo says:

      @hi: If you paid it off in less than 2 years, that’s not good.

      Your credit bureau and score are meant to determine your credit worthiness – your likelihood of repayment. This is determined in a proprietary algorithm that takes several factors into account – but one of those factors is the time an account is open. The longer you pay over time, the better things are. This is why you typically see loans start around the 3-5 year range.

      When you have an account and you pay it off early, you could pay it off early through several means:

      - You doubled up on payments, made early payments and worked really hard (yay!)
      – You took out another loan and paid off this loan, which means you really didn’t do anything special.
      – You came into some money and simply paid off the loan. This found money isn’t a normal circumstance, but you did the right thing.
      – You never really needed the loan, but took it out because you were letting an account earn a little more interest, letting a CD mature or were waiting for a windfall to come in – which means you never intended to see the loan through.

      Your credit report just indicates that it was paid and in what period of time. If you did it too fast, the algorithm isn’t into giving you the benefit of the doubt. You’ll get the lower rating on the loan. It’ll be the better lower rating because you paid it, but it won’t be a demonstration of making numerous payments over time.

      Lenders don’t want to see this fixed because there’s yet another issue for them – you paying off loans early doesn’t help them. They have a cost of obtaining you as a customer (reviewing your credit, processing your paperwork, etc.) which is designed to partly be redeemed though the interest you’ll pay over time. If you pay off your loans early, you’ll probably end up costing them money.