FHA disputed accounts: what lenders must do

What counts as a disputed derogatory account

The Handbook defines a disputed derogatory credit account as a disputed charge-off account, a disputed collection account, or a disputed account with late payments in the last 24 months. Those are the disputes that matter. An account that is disputed but zero balance, or disputed but current and paid as agreed, or disputed with late payments aged 24 months or older, is called non-derogatory and is handled separately below.

The $1,000 trigger for automated underwriting

When a loan is run through TOTAL Mortgage Scorecard, FHA's automated system, and the credit report used shows that the borrower has $1,000 or more collectively in disputed derogatory credit accounts, the mortgage must be downgraded to a Refer and manually underwritten. "Collectively" means the balances are added together across accounts, so three disputed $400 collections cross the line even though none does alone. The same downgrade list in the Handbook also includes recent bankruptcy, short sale, foreclosure and some mortgage lates, so a dispute is one of several reasons an Accept can turn into a manual file.

A worked example. A borrower disputes a $600 collection and a $550 charge-off, a total of $1,150. Of that, $400 of the collection is a medical bill. The medical balance is excluded, leaving $750, and the file is under $1,000. If instead the $400 were not medical, the full $1,150 would be counted and the file goes to Refer. Use the tool above to run your own figures.

What is excluded from the total

Two kinds of disputed balance do not count toward the $1,000: disputed medical accounts, and disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use. For the second kind the lender must include a copy of the police report or other documentation from the creditor in the file to support the status of the account. A dispute you simply say is fraud, with nothing behind it, does not earn the exclusion. In a community property state, disputed derogatory accounts of a non-borrowing spouse are not included in the cumulative balance used for the downgrade decision.

Manual underwriting: analysis and a letter

In a manually underwritten file, the lender must analyze the documentation for consistency with the rest of the credit information to determine whether the derogatory account should be considered in the underwriting. If the credit report shows you disputing derogatory accounts, you must provide a letter of explanation and documentation supporting the basis of the dispute. The medical and identity-theft items can be excluded from consideration in the analysis, and for identity theft, card theft or unauthorized use the lender must obtain the police report or creditor documentation.

Non-derogatory disputes

Where a borrower disputes a non-derogatory account, or disputes an account not shown on the report as disputed, the lender does not have to downgrade to Refer. It must still analyze the effect of the disputed accounts on the borrower's ability to repay. If the dispute would make the monthly debt payments used in the DTI ratio lower than the credit report shows, the borrower must document the lower payments. These balances are excluded from the $1,000 cumulative limit.

Practical advice

Disputing an account does not make it disappear for underwriting purposes, and filing a dispute shortly before applying can push an otherwise clean automated approval into manual review. If a balance is wrong, dispute it early and keep the paperwork. If it is a medical bill, say so in writing. If it is identity theft, get the police report. Because many collections also trip a separate rule, read the collection accounts page and the judgments page, and check your ratios in the DTI calculator.

Sources

• HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, Update 18 PDF: Underwriting the Borrower Using the TOTAL Mortgage Scorecard, downgrade list, p. 203; Disputed Derogatory Credit Accounts (TOTAL) and Non-derogatory Disputed Accounts (TOTAL), pp. 206-207; Manual Underwriting of the Borrower, Disputed Derogatory Credit Accounts (Manual), p. 291, and Non-derogatory Disputed Account, p. 302. Read November 2, 2026.
• HUD, Single Family Housing Policy Handbook 4000.1 information page. Read November 2, 2026.

Text read: HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, the clean Update 18 PDF that HUD links from its Handbook 4000.1 information page (HUD lists it as the August 12, 2026 update). Confirm current requirements with an FHA-approved lender, who may apply stricter standards of its own. This page paraphrases the Handbook and does not replace it. Page numbers cited are the Handbook's own and may be approximate; use the section headings to locate the text.