800 Credit Score Borrowers Putting 50% Down Can Be Denied for A Loan!!!
With an attention getting headline like this, one can only wonder how!
This post is aimed at consumers and realtors, and should provide some insight into a questionable practice that the automated underwriting systems employ when evaluating a borrowers credit profile. I've seen more and more situations where consumers are being turned down for mortgage loans that they easily qualify for due to a quirky technicality.
If you have accounts on your credit report that are listed as "Disputed" or "Consumer Disputes" on any one of the three big credit bureaus, the automated underwriting systems used by Fannie Mae and Freddie Mac will deny your loan.
Yes, you read it right..... if you spot a discrepancy on your credit report, dispute it in good faith, you may be rewarded with a notation on that account that says, "Disputed or "Consumer Disputes", you are in a very tough spot if you are in the process of obtaining a new mortgage loan. Here's what happens.....
When a loan officer runs a file through the AUS system - where DU (Fannie Mae) or LP (Freddie Mac), the credit report is scanned as part of the computerized underwrite. If the system detects the word "Dispute", the system provides a message to the loan officer, in essence putting the file in limbo. Here is a sample message:
Disputed Tradelines
The logic behind this is that there are numerous credit repair companies that use large scale disputes to unethically raise a clients credit score and attempt to circumvent valid items. This is obviously only a short-term fix, and does not truly repair any credit. Unfortunately, in an attempt to shut down this tactic, Fannie Mae and Freddie Mac have inadvertently penalized honest consumers who have attempted to dispute errors on their credit report. Consumers may have legal rights under the Fair Credit Reporting Act (FCRA) in disputing incomplete or erroneous information. As you can tell, these rights protected under Federal law, can sometimes be twisted against the consumers they were designed to protect!
So...where does this leave the borrower?
The applicant has no choice but to attempt to contact the account in question (credit card, car loan, mortgage, etc.) and request that they contact the credit bureaus to remove this language from the report. At a minimum this will take 4-6 weeks!
If you are only doing a refinance, it just stalls your application for 1-3 months! Can you imagine the effect on your purchase loan? It is almost a death blow to any purchase transaction -- if not for our current economy and market, it would spell death to any deal.
While many mortgage professionals know and understand this "glitch" in the AUS systems, it is not widely known by most realtors and consumers. The only real take away here is that when you review your credit report, you need to look at more than just "mistakes" or other negative items. Somtimes, it is something as simple and innoculous as this honest dispute that can kill the deal.
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