How a Credit Report Dispute Affects Homebuying

Have you ever had a disagreement with a creditor? If yes, you may want to think about how disputing that account could impact your plans to buy a home. You may not be able to get a mortgage if you have open disputed credit accounts. Here’s how to make sure you can seal the deal.

Borrowers may dispute items on their credit report if they disagree with the accuracy. Disputes regarding balance, rate, payments are most common.

These include:

Charge-off accounts (charge-off shows a due debt, but no payment due)
Collection accounts
Accounts with late payments in the past two years
Can also include any other credit account with “Dispute Status” reporting on the credit report

Consumers dispute accounts to improve their credit score, clean up their credit history or to improve their credit picture in most cases. Disputing an account is a measurable action to take, especially when the issue is due to theft or fraud. In those circumstances, a disputed credit account that was fraudulently opened would have no negative bearing with the mortgage lender.

But what if it is your account?

What if you disputed an account that is yours because you had a genuine disagreement with your creditor? Or if you wanted to see if you could remove derogatory items?

A Red Flag When Home Buying

It may seem unfair if you feel you have a genuine dispute with a creditor on an account that is yours. But the truth is, when it comes to getting a mortgage, lenders don’t like to see disputed accounts because it shows a potential for future liabilities that may impact your ability to repay the mortgage. Therefore, disputed accounts must be removed from the dispute status before you can seal the deal with the home sale.

So if you do have any disputed accounts on your credit report, be prepared by getting your paperwork together. The lender will need a letter of explanation for the disputed accounts and documentation to support the claim of the dispute.

If you have credit accounts in dispute, you may also have to pay more cash in order to close on the house. If the sum total of all disputed credit accounts is equal to or greater than $1,000, you’ll have to pay the debt down to zero in order to remove the dispute status. For example, if a consumer has $5,000 in disputed credit accounts, they can settle with the creditor for an agreed-on amount as long as the creditor reports it as “no longer reported as disputed.” This action will satisfy the mortgage lender in issuing your loan.

If the dispute accounts total less than $1,000, the lender will require the buyer to contact the creditor to change the reporting status from “account in dispute” to “no longer reported as disputed.”

Homebuyer Credit Tips

Undispute all credit accounts before applying for a new loan to purchase a home.
If you have not found a home yet, before home searching, see if you have any accounts that need to be zeroed out. Your lender can help you go through your most recent copy of your credit report.
If possible, avoid disputing any credit accounts (other than for theft or fraud).

[Editor’s Note: If you’re in the process of applying for a home loan, checking your credit scores is an important part of the process. You can use a free tool like the Credit Report Card to get a free credit score that is updated every 14 days.]