A lot of factors come into play once you're ready to buy a house. You need sufficient income to support a mortgage payment and cash in reserves for the down payment and closing costs. If you're getting a loan from a bank, your credit also matters.
If you pay your bills on time and you don't have a lot of debt, you probably think you're an excellent candidate for a loan, and feel you can walk into any bank and get prequalified with no problem. But there's a potential obstacle between you and homeownership. In fact, this obstacle may not come to mind until you’re rejected for a mortgage due to a low credit score.
If the rejection comes as a shock, your first inclination is to defend yourself and fight the lender’s decision.
But if you didn't check your credit report before applying for a home loan, the decision isn’t the result of lender error; it could be the result of identity theft.
How Identity Theft Affects Home Buying
Buying a home requires an established credit history, and depending on the mortgage program, you need a minimum credit score of 620. You're taking on a large debt, so lenders need to assess the risk and make sure you’ll able to repay every cent. This is why banks rely heavily on information found on your credit report. It reveals how likely you are to repay the debt, and it gives creditors a snapshot of what you currently own.
Identity theft, however, can put the brakes on a mortgage approval. It’s one of the fastest growing crimes, and although there's plenty of information available on how to protect ourselves, approximately 9 million people fall victim to identity theft every year.
There are different types of identity theft, and it involves more than someone swiping your credit card number and going on a shopping spree. Someone can get hold of your name, address and Social Security number and then buy cars in your name, homes in your name, and open new credit cards in your name.
There’s no question that you’re the victim. However, identity theft can prevent buying or refinancing a home. Getting a mortgage is hard enough, and the last thing you need is this extra headache.
What You Can Do If You’re a Victim
It takes acceptable credit to buy a house, and unfortunately, many lenders will not move forward with your application until the matter of identity theft has been addressed and corrected. There are different degrees of identity theft. In lesser cases where your score doesn’t dropped too much, you might still qualify for a mortgage. But to get to this point, you have to file a police report and report the identity theft to the Federal Trade Commission, where you’ll file an affidavit.
If you bring a copy of the police report and the affidavit to your lender as proof of the crime, the bank’s underwriter may overlook negative information that results from a stolen identity. But even with proof of theft, you could get stuck with a higher interest rate. This is because your mortgage rate is based on your credit score at the time of applying.
You have a difficult choice to make. You can either postpone the home purchase until all erroneous information is removed from your report and your credit score rebounds, or you can move forward with the purchase and accept a higher rate. Sadly, if damage from identity theft is too severe and can’t be fixed quickly, you could miss out on a property.
The good news is that once you have a police report and file an affidavit with the FTC, you can submit copies of these forms to the credit bureaus or reporting creditors. This provides enough information for creditors to stop reporting negative information and start an investigation. In the meantime, you can place a fraud alert on your credit report. This doesn't prevent you from getting new credit, but it does alert creditors to take extra steps to verify your identity. Another option is freezing your credit, which prevents new creditors from accessing your report.
Identity theft isn’t something you can fix overnight, especially in severe cases. Creditors will investigate the claim, and if the investigation shows fraudulent activity, these accounts will fall off your credit report one by one. But unfortunately, it can take several weeks, months or years to completely remove the erroneous information.
It's frustrating, but you'll eventually have a clean credit report again. Your credit score will increase as each negative item is deleted from your file. The more your credit score increases, the closer you'll get to a mortgage. As you patiently wait, continue to pay down legitimate debts and pay your legitimate credit accounts on time. This activity can only benefit your score.
Going forward, don't forget to check your credit report at least once or twice a year for fraudulent activity, and sign up for credit report monitoring. This way, anytime anyone uses your Social Security number to open an account, you'll receive an alert from the credit bureaus.