Borrowers are often advised to give themselves plenty of time in the pre-purchase planning stages to review credit report details to make sure there are no errors or outdated information. What happens if a borrower does see something on a credit report and chooses to dispute it?
Ideally, issues like these should be caught very early in the planning stages. You should check your credit report as early as one year prior to the home loan application in order to give yourself enough time to dispute items if required. But not all borrowers have that much time to deal with such issues, and FHA loan rules address disputed accounts in detail.
HUD 4000.1, the FHA single family home loan rule book, has two sections on disputed accounts-one for derogatory credit information and one for non-derogatory credit issues. Derogatory accounts are defined as follows:
“Disputed Derogatory Credit Accounts refer to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.”
Non-derogatory accounts are defined as follows:
“Non-Derogatory Disputed Accounts include the following types of accounts:
– disputed accounts with zero balance;
– disputed accounts with late payments aged 24 months or greater; or
– disputed accounts that are current and paid as agreed.”
For disputes over derogatory accounts, FHA loan rules list a set dollar amount standard for the lender:
“If the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the Mortgagee must include a monthly payment in the Borrowers debt calculation.”
But in that debt calculation, the lender is not to include medical accounts, disputed accounts resulting from credit card theft or identity theft, or the disputed derogatory credit data of a non-borrowing spouse where state community property laws are in effect.
For non-derogatory disputed credit accounts, FHA loan rules in HUD 4000.1 the rules are a bit simpler. According to page 268 of HUD 4000.1:
“If a Borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the Mortgagee must analyze the effect of the disputed accounts on the Borrowers ability to repay the loan. If the dispute results in the Borrowers monthly debt payments utilized in computing the DTI ratio being less than the amount indicated on the credit report, the Borrower must provide documentation of the lower payments.”