If a buyer has an account that he thinks was reported erroneously, he can file a dispute to the credit bureau and request that it be investigated and/or removed. In some cases, the account may have the wrong balance or it may not belong to the person. The credit bureau agency (Equifax, TransUnion or Experian) sends the disputed information to the Creditor who has 30 days to investigate the account and make the update, otherwise the account must be deleted from the credit file.
One reason for delaying the pre-qualification of a buyer is due to a disputed credit account. If an applicant has a disputed account on the credit report, it must be cancelled or closed before moving forward with a qualification. During the dispute, the code XB is placed on the account indicating that the account is being disputed which triggers the bureau into deleting the negative score impact of that account. If the credit report is pulled, the applicant will show a false higher score. If the dispute comes back as accurate, the collection account is re-activated which will most likely cause the score to drop.
If a Loan Officer fails to acknowledge the disputed account and the automated underwriting system doesn't decline the loan due to a disputed account, it can be a very costly mistake to the buyer if the financial contigency date has passed and the disputed account negatively impacts the credit score and the ability to qualify for the loan.
It is important to make sure that before applying for a mortgage, that any credit disputes are closed and/or cancelled.
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