Saturday, December 8, 2012

Accounts in Dispute on Credit Report = BAD


Accounts in Dispute on Credit Report = BAD

Imagine going through airport security, would you rather walk through the metal detector and be on your way or go into a small room for a slow in-depth search of you and your luggage?

For most mortgage applications the file passes through automated underwriting and moves on through underwriting to closing with relative ease, like the majority of passengers filing through security at the airport. However, just like the occasional passenger who left a bottle of liquid in their carry-on by mistake, or forgot to remove their collection of metal elements from their pockets, there are certain things that can trigger a deeper look at a mortgage file. One of the most common I encounter is when there are 'accounts in dispute' listed on the credit report, this classification on a credit report triggers a manual underwrite. 

A manual underwrite is when the automated underwriting is tossed and the file has to go through the full body cavity search, often times it turns up nothing, but in regards to those pesky accounts in dispute, they will likely have to be paid barring overwhelming documentation that they are a mistake, whereas if they were not in dispute they may not have had to be paid.

What are accounts in dispute? 'Accounts in dispute' is a classification of accounts that have been disputed by the borrower, but have not been resolved. Consumers should always dispute accounts on their credit reports that are incorrect, but the problem is with disputing accounts that are correct.

When someone disputes an account that is correct it will likely remain on the credit report as an 'account in dispute' rather than falling off. When an account is in dispute it is not supposed to score in the FICO score during the first 30 days while the dispute is going on, so it is a trick the credit repair industry uses in an attempt to circumvent the system: dispute everything whether it is correct or incorrect.

The problem with this is that not everything comes off the credit report, and those accurate accounts that do happen to come off will be put back on eventually. Credit repair as an industry is a waste of money for consumers, people need credit education so they know how to correct their credit reports when the need arises. My book The Credit Road Map covers the process of correcting the credit report, if you don't have it on your shelf come by my office for a complimentary copy. I always leave copies for real estate agents on my filing cabinet, if I am out just tell the front desk I left a copy for you in my office on my black filing cabinet. Take a copy for yourself and some for clients. 

People spend thousands of dollars on credit repair that gets them nowhere, and leaves accounts in dispute on their credit report. So what should they be doing? If the account is inaccurate, dispute it until it is off the credit report. If the account is accurate, do not dispute it, either pay it or don't pay it. If the client plans on buying a house in the next 12 months I would like to assess their credit report before they do anything so I can advise them on what to do. If their credit score is high enough, my advice will likely be to leave the report as it is, if there are collections, they have already done the damage by being reported, so paying them is not necessarily going to help much. If there are other past due debts out there that have not been reported on the credit report yet I want them to pay those immediately before they report and damage the credit score. Those become priority debts because they can knock the score below 620 and now the client may not qualify for a mortgage.

Here is the tale of two clients, both have a few thousand dollars in collections, the collections are accurate, the debts are owed, there is nothing incorrect about the collections. One client has done nothing with the collections, no disputing, has not paid the debts, but his score is high enough and is income is enough to qualify for a mortgage. The underwriter determined that because the collections were medical she was not going to require them to be paid.

The other client had about the same amount of debt, mostly medical collections, but had paid a credit repair person over $500 to 'repair his credit.' All the bad debts he owed were disputed, in the end they were not removed from his report, they were all classified as 'in dispute.' Due to the in dispute status the file is red flagged and has to be manually underwritten instead of automated, the mortgage was still approved, he had a high enough FICO score and had enough income, etc. The difference was that he had to pay the collections at closing in order to 'resolve' the dispute, if these were not in dispute in the first place he probably would not have had to pay them if he chose not to. If he did not have enough money to pay the collections this would have been a problem for the client.

In summary, we want to avoid manual underwriting when possible, and the best way is to make sure clients are not frivolously disputing accurate information on their credit report.

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com




© Copyright 2012 Patrick Ritchie All Rights Reserved






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