Minneapolis, MN: It is a fairly common practice recently, and people with credit report issues are told to do it on a regular basis, but disputing an item on your credit report may just end up getting your mortgage application denied!
Disputing bad credit really is the the heart of credit repair, but mortgage underwriting system have been improved and upgraded to deal with this issue. All mortgage loans start out by being run thought an automated underwriting system (AUS). The AUS looks at your overall application and your credit report to make a lending decision.
Having disputed items on your credit report will prevent an automatic approval, and force your loan to be down graded to an manual underwrite. It doesn’t matter if your score is acceptable.
A manual underwrite on your mortgage application is DRAMATICALLY more restrictive in guidelines than an automatic underwrite. You will be required to pay off collections, supply more documentation, and the whole process will take longer!
A good example would be debt-to-income ratios. On a computer approval, you may be approved with a 45% debt ratio. But if it a manual underwrite, it is 41% of bust.
I just had this occur to one of my clients (which is why I am writing this post). The client has an old car repo on his credit report with a $10,000 deficiency balance. With the computer approve, he would NOT have to pay the old item off to buy his house. Unfortunately, he tried disputing the repo and hoped it would magically go away. Well, it didn’t – and shouldn’t. So the dispute on the credit report turned his application into an manual underwrite, and under the manual underwrite guidelines, he MUST PAY IT OFF in order to buy his house. Ouch…