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Credit Disputes During Mortgage Underwriting

Credit disputes during mortgage underwriting refer to active dispute notations on a borrower's credit report that may cause the FICO scoring model to exclude the disputed account from the score calculation, potentially inflating the borrower's score. Agency guidelines require borrowers to remove dispute notations on accounts meeting certain balance thresholds and re-pull credit with updated scores before the loan can close.

Key Takeaways

  • Active credit disputes can cause FICO to exclude the disputed account from the score calculation, potentially inflating the borrower's credit score artificially
  • Fannie Mae requires evaluation of disputes on accounts with aggregate balances of $500 or more and may require dispute removal
  • FHA requires dispute removal on derogatory accounts with cumulative balances of $1,000 or more; otherwise the loan must be manually underwritten
  • Removing a dispute requires written notification to each credit bureau, which typically takes 7-14 business days to process
  • After dispute removal, the lender must re-pull credit and use the new (potentially lower) scores for qualification
  • Identity theft disputes are exempt from removal requirements when supported by a police report or FTC Identity Theft Report
  • Borrowers should check for and resolve active disputes before starting a mortgage application to avoid underwriting delays

How It Works

How Disputes Affect FICO Score Calculation

The FICO scoring algorithm is designed to exclude or reduce the weight of accounts that are actively disputed by the consumer. The rationale is that if the consumer is challenging the accuracy of the reported information, the data is uncertain and should not be used to penalize the consumer’s score during the investigation period. For a derogatory account (a collection, charge-off, or account with late payments), the exclusion removes a negative factor from the scoring model, which increases the score. For a non-derogatory account with a high balance, the exclusion may remove that balance from the utilization calculation, again increasing the score. The FICO model used in mortgage lending (FICO 5 for Equifax, FICO 4 for TransUnion, and FICO 2 for Experian) applies these exclusions when the dispute notation is present on the account.

Underwriter Evaluation of Disputed Accounts

When the underwriter reviews the borrower’s credit report and identifies accounts with dispute notations, the underwriter must evaluate whether the disputes could be inflating the score. This involves determining the nature of each disputed account (derogatory or non-derogatory), the outstanding balance on each disputed account, whether the aggregate balance of disputed accounts exceeds the applicable threshold for the loan program, and whether the disputes relate to identity theft or fraud. If the underwriter determines that the disputes could be inflating the score above what it would otherwise be, and the aggregate balance exceeds the program threshold, the underwriter issues a condition requiring the borrower to remove the disputes and obtain a re-pulled credit report with updated scores.

The Dispute Removal Process

To remove a dispute, the borrower writes a letter to each credit bureau where the dispute notation appears. The letter should include the borrower’s full name, current address, Social Security number (last four digits), the creditor name and account number for each disputed account, and a clear statement requesting that the dispute notation be removed from the account. The borrower should note that removing the dispute notation does not constitute an acknowledgment that the reported information is accurate. The letter should be sent via certified mail with return receipt requested to document the submission date and delivery. Some bureaus also accept dispute withdrawal requests through their online portals or by phone, though written correspondence provides the clearest documentation for the loan file.

Re-Pulling Credit After Dispute Removal

After the bureau confirms that the dispute notation has been removed (typically by updated credit report or written confirmation), the lender orders a new tri-merge credit report. The new report reflects the previously disputed account without the dispute flag, meaning the FICO algorithm now includes the account in its full calculation. The new scores are the scores of record for the loan. If the scores decrease but still meet program minimums, the loan proceeds with the updated scores. If the scores decrease below program minimums, the borrower must pursue other credit improvement strategies (such as paying down balances or waiting for negative items to age) before the loan can be approved. The re-pulled credit report replaces the original report in the loan file.

When Disputes Can Remain

Not all disputes must be removed. Non-derogatory accounts with disputes (such as a current account where the borrower is disputing a minor billing issue) generally do not need to have the dispute removed because excluding a non-derogatory account from the FICO calculation does not inflate the score. Disputed accounts with very small balances below the program threshold may also be exempt. Identity theft disputes supported by proper documentation are always exempt. Additionally, if the underwriter determines that removing the dispute and rescoring would not change the approval decision (because the borrower’s score significantly exceeds the minimum), the underwriter may use discretion to allow the dispute to remain, depending on the loan program and investor requirements.

Related topics include what lenders see on your credit report, collections, judgments, and liens on mortgage applications, rapid rescore for mortgage: how it works, and credit repair strategies before applying for a mortgage.

Key Factors

Factors relevant to Credit Disputes During Mortgage Underwriting
Factor Description Typical Range
Dispute Balance Threshold The minimum aggregate balance of disputed accounts that triggers the requirement for dispute removal $500 for Fannie Mae; $1,000 for FHA
Account Type (Derogatory vs. Non-Derogatory) Derogatory disputed accounts are more likely to inflate the score when excluded and are subject to stricter removal requirements Derogatory accounts: collections, charge-offs, late-payment accounts
FICO Score Impact The difference between the borrower's score with the dispute exclusion and the estimated score without it Can range from negligible to 50+ points depending on the nature of the excluded account
Bureau Processing Time Time required for the credit bureau to process a dispute removal request after receiving the borrower's letter 7-14 business days ; varies by bureau and submission method
Identity Theft Documentation Supporting evidence required to qualify for the identity theft exception to dispute removal requirements Police report, FTC Identity Theft Report, creditor fraud acknowledgment letter

Examples

FHA Loan with Disputed Collection Above $1,000 Threshold

Scenario: A borrower applying for an FHA loan has a credit score of 620 and two disputed collection accounts: a $1,800 medical collection and a $600 credit card collection. The total disputed derogatory balance is $2,400, exceeding FHA's $1,000 threshold . The underwriter issues a condition requiring the borrower to remove both disputes, re-pull credit, and use the new scores for qualification.
Outcome: The borrower removes the dispute notations and the lender re-pulls credit. The new scores drop from 620 to 592, as the FICO model now includes the collection accounts in the calculation. The borrower's score still exceeds FHA's 580 minimum for the 3.5% down payment tier, so the loan can proceed. However, the lower score may result in a higher mortgage insurance premium or less favorable pricing. If the scores had dropped below 580, the borrower would need 10% down or would need to pursue credit improvement strategies.

Conventional Loan with Identity Theft Dispute Exception

Scenario: A borrower applying for a conventional loan has a disputed account for $3,200 on a credit card that was opened fraudulently. The borrower has a police report, an FTC Identity Theft Report, and a letter from the credit card company confirming the account is fraudulent. The underwriter reviews the documentation and determines that the identity theft exception applies.
Outcome: The dispute does not need to be removed, and the borrower's current credit scores stand as the scores of record. The fraudulent account is appropriately excluded from the FICO calculation because it does not represent a legitimate obligation of the borrower. The loan proceeds without delay, and the identity theft documentation is retained in the loan file.

Dispute Removal Causing Score to Drop Below Program Minimum

Scenario: A borrower with a credit score of 625 is applying for a conventional loan with a 620 minimum. The borrower has a disputed charge-off account with a $2,500 balance. The underwriter requires the dispute to be removed. After removal and re-pull, the borrower's score drops to 608, below the 620 minimum.
Outcome: The loan cannot be approved with conventional financing at the current score. The borrower's options include switching to an FHA loan (which has a 580 minimum score), pursuing credit improvement strategies to raise the score above 620 (such as paying down credit card balances to reduce utilization), or waiting for the charge-off to age further and naturally have less impact on the score. The borrower may also request a rapid rescore if there are other account changes that could offset the score decrease.

Common Mistakes to Avoid

  • Filing new credit disputes while a mortgage application is in process

    Opening a new dispute during underwriting creates the exact problem that the lender is trying to avoid: a potentially inflated credit score due to account exclusion. The new dispute may trigger an additional condition from the underwriter, require another round of dispute removal and credit re-pulling, and further delay the loan. Borrowers should resolve all disputes before applying or wait until after closing to file new ones.

  • Assuming that removing a dispute means agreeing the information is accurate

    Removing a dispute notation does not prevent the borrower from re-disputing the account after the mortgage closes. The withdrawal letter should explicitly state that the borrower is removing the dispute for mortgage qualification purposes and is not conceding the accuracy of the reported information. After closing, the borrower can re-file the dispute with the bureau if they still believe the information is inaccurate.

  • Not checking for active disputes before starting the mortgage application

    Many borrowers file disputes and forget about them, or file disputes through credit monitoring apps without realizing they remain active on the credit report. An unexpected dispute notation discovered during underwriting can add weeks to the loan timeline. Borrowers should review their credit reports for dispute notations before applying and resolve any active disputes in advance.

  • Failing to account for the potential score decrease after dispute removal

    When a dispute is removed and the previously excluded account is factored back into the FICO calculation, the score may decrease. Borrowers who are close to the minimum score requirement should understand this risk before removing disputes. A loan officer can help assess whether the borrower's score has sufficient margin above the minimum to absorb the potential decrease, or whether additional credit improvement steps should be taken concurrently.

Documents You May Need

  • Written dispute withdrawal letters sent to each credit bureau (with copies for the loan file)
  • Certified mail receipts or delivery confirmation for dispute removal correspondence
  • Updated credit report confirming the dispute notation has been removed
  • Letter of explanation describing the nature and reason for each dispute
  • Identity theft documentation if applicable (police report, FTC Identity Theft Report, creditor fraud letter)
  • Re-pulled tri-merge credit report with updated FICO scores after dispute removal

Frequently Asked Questions

Do I have to remove all credit disputes before I can get a mortgage?
Not necessarily. The requirement depends on the loan program, the nature of the disputed accounts, and the aggregate balance of disputed accounts. Non-derogatory disputes, disputes on accounts with small balances below program thresholds, and identity theft disputes generally do not need to be removed. Derogatory disputes on accounts exceeding the program threshold (approximately $500 for conventional, $1,000 for FHA ) typically must be removed before the loan can close.
Will removing a dispute lower my credit score?
It can. If the disputed account was being excluded from the FICO calculation and that exclusion was raising your score, removing the dispute and having the account scored normally may result in a lower score. The decrease depends on the nature of the account. A disputed collection that was being excluded entirely could cause a significant score drop when included. A disputed non-derogatory account may have little impact. Your loan officer can help estimate the potential score change before you remove the dispute.
How long does it take to remove a credit dispute?
The credit bureaus typically process dispute removal requests within 7 to 14 business days after receiving the borrower's written request. The total timeline includes mail delivery time (or immediate submission if done online), bureau processing time, and the lender's re-pull of credit. From start to finish, the process typically adds two to four weeks to the loan timeline. Borrowers under contract should factor this into their closing timeline and communicate the potential delay to all parties.
Can I re-dispute the account after my mortgage closes?
Yes. Removing a dispute for mortgage qualification purposes does not waive your right to dispute the account in the future. After your mortgage closes, you can file a new dispute with the credit bureau if you still believe the information is inaccurate. The dispute removal during the mortgage process is a procedural step to ensure the FICO score accurately reflects your credit profile for underwriting purposes, not a permanent concession regarding the accuracy of the information.
What if I have a legitimate dispute and the information really is wrong?
If the information is genuinely inaccurate, you should resolve the error directly with the creditor and obtain a correction letter before removing the dispute. You can then use the correction letter as part of a rapid rescore to update the credit file quickly. If you remove the dispute without resolving the underlying error, the inaccurate information will be scored as if it were accurate, potentially lowering your score. Work with your loan officer to develop a strategy that addresses both the dispute requirement and the error correction simultaneously.
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