Did you know you could dispute items on your credit report?  Did you know that disputing items has become a popular method to clean up your credit and improve your score?  I am here to tell you that credit disputes impact mortgage qualifying, so be careful.


Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) was put in place in the 70s but was amended under the Fair and Accurately reflect Credit Transactions Act (FACTA) in 2003.  This amendment to the FCRA provides rights to consumers to protect against inaccurate information being reported on to your credit report.

FACTA provides the right for consumers to do two main things:

  1. Obtain a FREE copy of their credit report each year
  2. Dispute any inaccuracies found on their credit report

30 Day Clock

Under the FCRA and FACTA there is a 30 day clock after an item has been disputed.  According to the FCRA:

“Inaccurate, incomplete or unverifiable information must be removed or corrected, usually within 30 days.”

Maybe you are starting to see how disputing items has helped some to improve their score.  Here is what they do.  They identify all the negative items.  Yes, negative, not inaccurate, but negative.  They then dispute every single negative item on their credit report.  Then they wait…

They wait 30 days and then contact the credit bureaus to have the items removed from their credit report if a response has not yet been received by the company who is reporting the negative item.

Voila! Your credit report is now clear of most, if not all, the negative items.  Your score has jumped significantly and your credit qualifications now look great.  Sounds good, right?  Not so fast…

Reappearing Ink

Just like a fun magic trick that has disappearing and reappearing ink accurate items that have been disputed for the purposes of having them removed from your credit report will very likely reappear in time.  30 days is a pretty quick time frame for most large organizations handling thousands, if not millions, of accounts to respond to a dispute made by an individual.  Eventually they get to the dispute, check their records, verify it is accurate and return that information back to the credit bureaus.

The credit bureaus in turn update their records and put the disputed account back on the credit report.  But now the item is back on the credit report, as it was before, along with a note that you disputed the account.

Mortgage Qualifying

Many consumers worked with “credit repair companies” that found this Fair Credit Reporting Act 30 day time frame and would charge consumers to dispute all the negative items and help them to clean up their credit reports.  These consumers, thinking their credit was now clean and the score looked good, would go and apply for a mortgage.  The mortgage loan officer would run a credit check and verify that their credit looked great.

The mortgage transaction would move forward and maybe go as far as close.  Then the trouble began.  These falsely represented credit reports started to get updated with the negative items.  The mortgage loans were defaulting.  Mortgages companies started to investigate what was happening and figured out that the “clean” credit reports were actually just a temporary condition between the disputes and the negative item being verified and returning to the credit report.

New Rules

New rules were put in place to avoid this situation.  Maybe not entirely, but as much as could be avoided.  Disputes were now almost as bad as a negative item on your credit report.

Depending on the loan program you are attempting to qualify for there are different rules.  FHA is one of the most widely used and most forgiving, when it comes to credit, loan programs available.  Here is what FHA says about disputed accounts:

“If the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the mortgage must downgraded to a Refer and manually underwritten.”

Most mortgage loans are underwritten by the computer first through automated underwriting systems (AUS).  Then the data input used to submit to those automated underwriting systems is verified and confirmed by a person underwriter.  The benefit of using an AUS is reduced documentation requirements, expanded rules and guidelines, etc.  There are a lot of benefits of getting a mortgage approval using an AUS.  The quote above explains that if you have negative accounts (accounts with late payments in the most recent 24 months or non-medical collections) that you have disputed you are not eligible for getting an AUS approval but instead must go to a person underwriter for review, eliminating any benefits of an AUS approval.

What You Should Do

I encourage every consumer to obtain a free copy of their credit report each year from each of the three major credit bureaus.  There is only one way to do this for free as required by the FCRA – visit http://www.annualcreditreport.com.  Sites like FreeCreditReport.com or CreditKarma may provide you with a “free” report but only after signing up for some service.  Those sites also encourage you to pay for a credit score, which is not necessary or accurate as compared to the score your mortgage company will pull.

Once you obtain your credit report, review for accuracy.  Not whether an item is negative or positive but whether it is accurate or not.  If you find an inaccuracy, dispute it UNLESS YOU ARE ATTEMPTING TO QUALIFY FOR A MORTGAGE.  If you are in the process of or plan to obtain a mortgage speak with your loan officer before disputing any items on your credit.  If you do not have plans to obtain a mortgage or any other debt in the next 12 months or so, dispute the account and work to get it corrected on your credit report.

If the account is negative, but accurate, do not use the dispute strategy to remove it from your credit.  All you will be doing is wasting your time and energy to have an item reappear on your credit report in time.  Work to resolve that negative account – pay on time or contact the collection agency to settle the debt and show it as paid in full.

Keep in mind I am a mortgage professional and not a credit improvement expert.  My advice is purely my opinion based on the research I have done (with links provided above) and my experience assisting my customers with mortgage qualifying.  You should seek out the advice of a qualified credit repair professional if you are attempting to repair your credit.

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