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How a Credit Report Dispute Could Stop You From Buying a Home

real estate agent working in the office and piles of paperwork, model house on the foreground and mortgage loan documentation

Buying a home is a significant life event. Even with great credit and secure financial support, getting approved for a mortgage is no easy task in the modern climate. Those who try to repair their credit could find themselves in for a nasty surprise during the homebuying process.

Here's what you need to know about credit report disputes, and how they can stop you from buying a home.

The Mortgage Pre-Approval Process

A mortgage pre-approval is an essential first step in the home buying process. By going through this process, you can confirm how much money you'll be allowed to borrow based on a variety of factors. These factors include proof of income (the longer you've been with a company, the better), personal documentation, proof of assets (i.e., showing you have enough for a down payment), and of course, your credit score.

A mortgage pre-approval is different from the calculator you've used to determine how much you qualify for when getting a mortgage. This is a formal process that starts the initial paperwork for your home purchase. 

Your Credit Score

Your credit score plays a vital role in how much money you'll be approved for and what financing options are available to you. The better the credit score, the lower your interest rates, and down payment requirement may be. In the USA, you will need a minimum 620 credit score to obtain a conventional mortgage. In Canada, the minimum just increased to 680.

Your credit score is ultimately impacted by paying your bills on time, as well as your debt ratio (how much you're approved to borrow versus how much you use). Things like the age of your credit and hard inquiries also impact your score. The more negative items, the lower your score will be.

What is a Negative Item?

A negative item is a series of missed payments or unpaid debts that may have gone to collections. In other words, it's a red flag that you may default on your mortgage. These generally last between seven and ten years, depending on where you live.

The Dispute Process

What about when you find a negative item on your credit report that shouldn't be there? That's where the dispute process comes in. Taking time to learn how to dispute errors on your report can help you repair your credit score. This could cover anything from the wrong name being attached to the debt, or the item showing after the statute of limitations has passed. 

How the Dispute Process Impacts Mortgage Approval

Unfortunately, while the results of your dispute may help your credit score, the process may impact your mortgage approval. At a glance, your lender may not recognize a wrongfully assigned negative item. They will, however, notice that the item is in dispute. This is sometimes a red flag that you try to get out of your debts.

However, there's a difference between disputing an item on your report and disputing everything listed. If you truly know that an item is incorrect, and you can prove it, it's worth challenging it.

Tips for Moving Forward

Work with a mortgage provider who talks to you rather than treating you like a number. If you have any disputes on your credit report, calmly explain the issue and why you're trying to rectify it. It's also worth looking at your credit report well in advance of starting the pre-approval process to ensure disputes are resolved before applying.

Finally, don't dispute debts that you rightfully incurred to try and clean up your credit report. Instead of a traditional dispute, you can reach out and offer to pay for their removal.