How are disputed credit accounts considered for manually underwritten loans?

Disputed Derogatory Credit Account refers to disputed charge off accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.   If the credit report indicates that the Borrower is disputing derogatory credit accounts, the Borrower must provide a letter of explanation and documentation supporting the basis of the dispute.   If the disputed derogatory credit resulted from identity theft, credit card theft or unauthorized use balances, the mortgagee must obtain a copy of the police report or other documentation from the creditor to support the status of the accounts.  If the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the lender must include a monthly payment in the Borrower’s debt calculation.   The following items are excluded from the $1,000 cumulative balance: 
•     disputed medical accounts; and 
•     disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use. 
•     Accounts of a non-borrowing spouse in a community property state  

If a Borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the lender must analyze the effect of the disputed accounts on the Borrower’s ability to repay the loan. If the dispute results in the Borrower’s 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.  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 additional information see Handbook 4000.1 II.A.5.a.iii(F); II.A.5.a.iv(L)–(M) available at

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-04845