"Always check your credit report for errors, and dispute any errors as soon as possible." We normally give this advice, but there are a few exceptions to this rule – including when you are preparing to apply for a mortgage loan.
Errors in credit reports should generally be disputed because of the potentially detrimental effects on your credit score. Matt Schulz, Senior Industry Analyst at CreditCards.com, puts it this way: "The thing about a credit score is it's not really important every single day, but when it's important, it's really important."
Mortgage loans are one of those important occasions where a high credit score is essential – you want your credit score to be as high as possible in order to qualify for the best interest rates and save thousands of dollars over the life of a loan. Unfortunately, if a loan officer sees that items on your credit report are in dispute, they can't properly assess your risk. At best, you are likely to receive a poor interest rate offer. At worst, you may not qualify for a loan at all while the dispute is ongoing.
Millennial Money Expert Stefanie O'Connell notes that credit card disputes "can be a time-consuming process."
Prolonged dispute resolutions work against you if you are seeking a mortgage loan, and the multi-step resolution process is not always straightforward.
You start the credit report dispute process with the three major credit bureaus (Experian, Equifax, and TransUnion). In turn, the credit bureaus will attempt to verify the charge with the original creditor. Greg McBride, Chief Financial Analyst at Bankrate.com, explains, "The burden of proof is on the creditor that has reported that information [to the credit bureaus]. They have 30 days to respond. If in 30 days they cannot validate what they have reported, the erroneous information is resolved in the favor of the consumer."
Unfortunately, the collective process can take months, especially if the dispute is not initially resolved in your favor or there are multiple charges involved. Appeal paths are available, but they are time-consuming. In the meantime, you may lose the opportunity to acquire your dream home at a reasonable price.
Lenders may require that you resolve the dispute and provide proof of removal with a revised credit report (which can take up to one billing cycle). Lenders that will still consider your application will require a letter explaining the reason for the credit dispute, along with copies of documents that support your claim. An explanation may not be sufficient to allow you to qualify, or to receive a good rate offer if you do qualify, but if you're already into the loan application process, you may have no choice other than to make the best of the situation.
You must weigh the seriousness of the error in your credit report against the possible impact on your mortgage application. Issues that are related to identity theft or fraud are a no-brainer – you must handle those disputes immediately to limit the damage. If you would like to prevent identity theft, check out our free Identity Protector.
If you are already too far into the mortgage process, check with your loan officer to find out whether any credit issue is worth disputing in order to avoid loan delays or acquire better terms. The best step is to be pre-emptive and check all of your credit reports at least six months before starting your mortgage loan application. Doing so also gives you time to build your credit score if you find it to be lower than you expected. Either way, you can save significant cash and headaches. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.