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Credit Report Disputes Hamper Mortgage Loan Approvals

Common wisdom would suggest that consumers with top-notch credit should have no trouble getting a mortgage or refinancing approved. But an 800 credit score may not be enough if you have a dispute on your credit report—even one from several years ago.

A relatively new policy from mortgage giants Fannie Mae and Freddie Mac flags any application where the applicant disputes something on a credit report. That’s causing big hiccups and even denials for applicants, no matter the strength of their qualifications, loan officers say.

“When this started, loan officers were just in shock,” says Christopher Cruise, a Maryland loan originator who trains loan officers on compliance with finance regulations. “It’s a violation of the Fair Credit Reporting Act, which allows you without penalty to challenge issues on your credit report.”

The problems arise when consumers have a dispute noted on their credit report, which can occur if you question charges on your credit card statement, for example. Computer underwriting software flags mortgage applications with these disputes. In theory such applications are then referred for manual underwriting.

Trouble is, in practice, loan officers say a rush of new applicants wanting to take advantage of historically low mortgage rates means underwriters are swamped, and many flagged applications instead get put on hold or simply denied.

“Some of these underwriters … won’t process a loan” with the notation “consumer disputes this item,” says Eddie Johansson, president of Credit Security Group,a credit services company in Texas.

Johansson began seeing this problem surface in February. One of his clients was denied a loan because of a disputed collection from eight years prior. In another case, a client had a credit score of 785 but faced trouble over a dispute on a gas credit card from seven years earlier.

For their part, both Fannie Mae and Freddie Mac say having a credit dispute alone should not prohibit a consumer from getting a loan approved.

“Our policy requires the lender to determine and document whether or not the disputed information is accurate and underwrite the borrower’s credit accordingly,” says Fannie Mae spokeswoman Amy Bonitatibus. “We are reviewing the policy to ensure that borrowers with legitimate disputes are not adversely affected by our underwriting criteria.”

Michelle Diament is a frequent contributor to the AARP Bulletin.

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