How Your Credit Clean-Up Could Derail Your Mortgage Approval

When I ask a potential homebuyer if they know their credit score and they do, I do a little happy dance inside.  This tells me that they're proactive buyers who have probably already taken any steps needed to improve their credit, allowing them to get better terms on their mortgage.

There is also a little red flag that goes up in my head when I hear this, though.  If a buyer has taken steps to review and improve their credit score, there's a chance they've filed a dispute on things on their credit report.

"So what?"  you ask.  "Isn't it a consumer's right to file a dispute?"  Absolutely.  If something is wrong on your credit report you should dispute it and get it fixed.  While that's happening though, your lender will not be able to approve you for a mortgage.

WHAAAAAT???

Yep.  It's true.  A mortgage lender cannot approve your mortgage with an open dispute showing on your credit report.  Any disputes have to be removed or resolved.

Here's why - when a consumer files a dispute, they are telling the credit reporting agency that the item in question is wrong.  The credit reporting agency takes steps to confirm that.  To be fair to the consumer while that process is happening, they remove the disputed item from the calculation of the credit score.

The removal of that item likely will inflate the credit score (you wouldn't be disputing it if it was good stuff, right?) , which means you likely have a higher score while that dispute is in place than you would if it wasn't. 

When a loan underwriter sees a dispute on a credit report, this raises a red flag that tells them that your credit score is not a true credit score.  It's a temporary one until the item(s) in question are resolved.  Because of that, they have to stop the mortgage approval, get your dispute removed or resolved, and have your score recalculated.

This would not be a huge problem if a lender looked for disputes right upfront and discussed it with the buyer before a home was found.  The problem is, most loan originators don't think about this risk and don't review the credit report for it.  This often isn't recognized as a problem until a buyer is a couple of weeks into the process of a home purchase.

If the disputed item is newer or more significant in nature, the impact of adding it back into the credit score can be enough to cause a loan to be declined, sometimes days before closing.

So....what do you do now that you know this?  First, if you have any open disputes, contact the credit reporting agency to get them resolved and removed.  Second, when your lender pulls your credit report, ask them if there are any disputes showing on it.  Third, if the lender seems confused by the question or tells you that some are there but that they don't matter, find a more informed lender.

For homebuyers in Indiana and Michigan, I'd be happy to be that 'more informed lender'.  Just give me a call or drop me an email if I can be of service!

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.