Disputed Credit Items Must Be Cleared up Before Loan Approval

The latest threat to stopping your next closing is the word “dispute” showing up on your buyer’s credit report.  Disputed accounts are not new but the emphasis that mortgage investors are placing on them is.  In 2011, there are more mechanisms in place that enable a consumer or creditor to file a dispute with one or all of the credit bureaus.  As a result, the word “dispute” is showing up on more and more credit reports, and many investors are now requiring all disputes to be settled before the loan is approved.  Unfortunately, clearing up a disputed item can take a lot of time and effort.  So, what should a buyer do when a “dispute” shows up on their credit report?  I suggest that they follow the following five steps:

Step 1: Know what each of the three credit bureaus are reporting.  This means reviewing credit reports from Equifax, Experian, and TransUnion.  A consumer can obtain a free copy of their report once a year from an online service such as annualcreditreport.com.  Of course, a mortgage credit report includes reports from all of the bureaus into one easy to read report.  Be aware that the bureaus do not report all of the same information, so it is imperative to review reports from all three bureaus.

Step 2: Contact the creditor to discuss the disputed item.  The disputed item is not as much of a priority to the creditor as it is to the consumer.  Thus, it can be hard to get the creditor’s full cooperation.  If the consumer is the one who initiated the dispute, then it is much easier to resolve the dispute.  If the consumer no longer wishes to dispute the account, they can simply write a letter to the credit bureau asking for the dispute to be removed.  The letter must be signed and dated and refer to both the specific disputed account as well as the account number.

Step 3: Get a letter in writing confirming that the item is no longer disputed.  The credit bureaus have different requirements for how the letter must read.  Equifax is the strictest and requires that the letter be specifically worded as follows: “We have instructed the bureaus to delete the account in dispute notation.”  The letter has to be in past tense and it has to state “account in dispute.”  The letter also has to be dated within 30 days, on company letter head, reference at least 4 digits of the account number, and include the borrower’s name.  Getting a letter that fits these exact specifications can be easier said than done.  It might entail making several calls or even demanding to speak with a senior manager.  Through perseverance, such a letter can be normally obtained though.   

Step 4: Send the letter to each of the three credit bureaus.  It is critical to not stop at Step 3 but to also get the letter in writing and send it to each of the credit bureaus.  Be aware that the bureaus are allowed 30 days to resolve direct consumer disputes, so again this process can drag out.   

Step 5: Follow up and make sure the dispute removed.  The credit reporting industry is sloppy and following up to make sure they are now reporting accurately is an important step.   

In summary, it can take some time to complete all five of these steps.  If a mortgage closing is at stake, technology known as Rapid Rescore is in place that can speed up Steps 4 and 5 into a matter of a few days.  With a letter from the creditor, the cost of this rescore is $30 per account, per bureau, per person.  Without the letter, the bureaus can sometimes still verify this information verbally over the phone, but the cost increases to $50 per trade, per bureau, per person.  The rescore can be expensive but it might be the only way to get your deal closed by next week!

Minimizing the Credit Card Balance Ratio to Maximize Your Credit Score

Most people today understand the importance of having a good credit score, however, few understand how much credit card balances and limits affect their score.  The credit scoring model places a lot of emphasis on the ratio of a credit card’s balance to it’s limit.  The lower this ratio the better and the optimal ratio is less than 30%.  A high ratio lowers a score and, if combined with other maxed out credit cards, can do so significantly.  To maximize your credit score, increase the limit on your cards as high as possible and then decrease your balances to no more than 30% of the limit.  Use additional credit cards if you need to, but keep your credit card balance ratio as low as possible.  If you would like to know your credit scores, just let me know as I would be happy to pull your credit report for you.

The Impact of a Foreclosure or Short Sale on One’s Credit

With today’s real estate market driven by foreclosures and short sales, a common question today is how will a foreclosure, short sale, or loan modification affect one’s credit score?  Below is some helpful information regarding each one of these areas.  To fully understand these comments, it is important to understand that currently there are no codes or mathematical algorithms that distinguish between a foreclosure, deed-in-lieu of foreclosure, or short sale.  Thus, current credit scoring models treat all three of these occurrences the same.  In addition, it is important to understand that every credit report is based on different variables and, thus, how much one’s score will be impacted is impossible to gauge (i.e. someone with a fabulous long-term past credit history will be less affected than someone with a brief negative credit history).

Foreclosure

• Remains on a credit report for 7 years.
• Current Conforming guidelines require a waiting period of at least 5 years since the completion date of the foreclosure as well as a 10% down payment and at least a 680 credit score.  In addition, no 2nd home or investment property purchases are allowed nor cash-out refinances until the foreclosure has dropped off of the credit report.   
• FHA guidelines require a waiting period of 4 years since the completion date of the foreclosure or 3 years if there have been extenuating circumstances.

 Deed-in-lieu of Foreclosure

• Although this is a “voluntary” foreclosure, it is reported the exact same way as a foreclosure on a credit report.
• The Conforming guidelines are the same as for a foreclosure but require only a 4 year waiting period rather than 5.

Short Sale

• Can be reported as either a charge-off, a settlement, or a type of foreclosure on the credit report (different creditors do it different ways).   
• Thus, how much a score will be affected depends on who is doing the reporting and how they are choosing to report.   
• Despite some reports to the contrary, there is no set answer to how much a credit score will be affected on a short sale.  It is a type of foreclosure, so it is best for one to expect the same foreclosure guidelines as above to be in effect for a short sale unless the foreclosing bank clarifies otherwise. 

Loan Modification

• Under this arrangement, a lender simply lowers the borrower’s rate and payment.  This solution does not reduce the principal balance nor is the lender forgiving any of the debt.  A loan modification is simply a method to avoid foreclosure and it is not considered as serious as the other methods above.
• On the credit report, a loan modification is reported as a “Partial Payment Plan.”
• Credit scores will decrease with a loan modification but how much will depend on the other factors showing on the credit report.

The bottom line is that clearly one’s credit score will be adversely affected by any of the above occurrences, however, the exact amount of impact remains quite a mystery.

How to Get a Free Credit Report

In 2004, the Fair and Accurate Credit Transaction Act was passed enabling consumers to obtain a free credit report from each of the three national credit bureaus once a year. While there are many Web sites that claim to provide a “free” credit report, there is only one place that offers a truly free credit report with no strings attached: www.annualcreditreport.com. Be aware that this free credit report does not come with credit scores. If you or one of your customers would like to find out credit scores, just let me know and I will pull a report for you. If you wish to learn more about credit reporting and scoring, here is an excellent Web site for you to check out: www.credco.com/crediteducation. Also, if you have questions about your report or wish to dispute an item, here is the contact information for each of the three credit bureaus:

Equifax Information Service Center
PO Box 740241, Atlanta, GA 30374-0241
(800) 685-1111 / www.equifax.com

Experian Information Solutions, Inc.
PO Box 2002, Allen, TX 75013
(888) 397-3742 / www.experian.com

Trans Union Corporation
PO Box 34012, Fullerton, CA 92834
(800) 916-8800 / www.transunion.com