Why Credit Monitoring Is Important When Applying For A Mortgage
Disclaimer: The scores you obtain through a bureau or credit monitoring service, like Privacy Guard, may differ than the scores obtained by lenders.
Buying a house is one of the biggest decisions you can make in your life, so it’s important to go into it feeling prepared. But if you think saving up the money for a down payment is the only thing you need to do to get a mortgage, think again. In reality, there are several steps you can take to help prepare and increase your chances of approval, like paying down existing debt, assessing your budget, monitoring your credit report and score with services like PrivacyGuard, and much more.
Credit monitoring is especially important when buying a house. Combined with factors like your income, the amount of debt you carry and other considerations, your credit can have a big impact on your mortgage approval odds, interest rates, and loan terms.
Why do I need to know my credit score when applying for a mortgage?
Knowing the status of your credit is the first step in preparing to apply for a home loan. That’s because your credit score is an important factor that lenders consider when determining whether to extend you a home loan and what the interest rate and terms of your loan will be. Although the score you obtain through a bureau or a credit monitoring service like PrivacyGuard may not be the same as the scores obtained by your lender, it may help provide a range of where your credit score is prior to starting the home buying process.
Can you buy a house with a 600-credit score?
It is possible to buy a house with a 600-credit score, but you’re more likely to get the terms and interest rates you want with a higher score. Lenders rely on a risk-based pricing system that uses credit score ranges that generally go up to 850 and other factors to set your APR (annual percentage rate) and monthly payment; the higher your score, the less risky you may seem.
If you plan to work on raising your credit score before applying for a mortgage, monitoring your credit reports can also help you track your progress toward your goal and watch out for any mistakes.
Does a mortgage pre-approval affect your credit score?
Yes, mortgage pre-approvals can have a small impact on your credit score, but the impact is generally short-lived. To get a mortgage pre-approval, your lender has to request a credit check from one or more of the three major credit bureaus, which will appear on your credit report as a hard inquiry. Hard inquiries are associated with taking on new debt, so they may cause your credit score to drop a few points temporarily.
Mortgage preapproval involves nearly as much financial scrutiny as a loan application, so it may be worth the small hit to your credit score to help you save time securing full approval. Plus, having the pre-approval letter in hand when you find the house you want could give you a leg up on other prospective buyers.
What else do lenders consider when you apply for a mortgage?
Lenders use a variety of different information when considering an application for a mortgage. Credit, for example, isn’t the only factor that determines whether you get the loan rates and terms you want. Lenders may also take into account things like:
Income & employment history
The stable and reliable flow of income is an important consideration in the mortgage loan underwriting process for lenders. It's important to prove that you can pay that mortgage payment. Individuals who change jobs frequently, but who are nevertheless able to earn consistent and predictable income, are also considered to have a reliable flow of income for qualifying purposes. Lenders consider the following income types as acceptable forms of continuous income (but not limited to): base salary, self-employment income, rental income, disability income (long term), social security, etc.
Debt-to-income (DTI) ratio
The amount of debt you have in proportion to your income is another important factor in determining your creditworthiness. It tells lenders how much of your monthly pay is going toward debts, which may be an indication of whether you’re capable of taking on more debt. If your DTI is too high, you could incur higher interest rates on your loan or be rejected altogether.
Down payment
Lenders also consider the size of your down payment when you apply for a mortgage. Putting down more money at the start not only reduces the amount you have to pay down in installments but indicates to lenders that you have sufficient funds to pay back the rest. That makes you seem like less of a risk and can help you qualify for a mortgage with more favorable terms.
Assets
Your assets and property may also weigh into the likelihood of your getting a home loan, though to a lesser degree. Having high-value assets makes you seem less risky to lenders because they indicate you may be more likely able to make a larger down payment and make your monthly payments on time.
How can I monitor my credit?
Monitoring your credit with services like PrivacyGuard means watching for unexpected changes in your credit score and credit report that could indicate negative credit behaviors. Credit scores are generally updated once a month, so it’s important to check them consistently to monitor your progress.
You should also review your credit report frequently to ensure that all of the information is correct. Every year you have the right to request one free copy of your credit report from each of the three major credit bureaus, but additional free credit reports may be available under certain circumstances, e.g., if you believe your file is inaccurate due to fraud.
If keeping track of all of that information by yourself seems overwhelming — or if you want to be able to check your credit report more frequently — consider signing up for a credit monitoring service like PrivacyGuard. PrivacyGuard offers monthly credit reports and scores* from each of the major credit bureaus, as well as updates about changes in your credit file to help you track toward your goals. PrivacyGuard also proactively monitors your information for you and alerts you to any potential issues.
What should I look for when monitoring my credit?
There are several things you should look for to ensure that your credit report is complete and accurate before you apply for a mortgage:
Errors
Incorrect information can appear on your credit report for several reasons. It could happen because the credit bureaus process information incorrectly or because lenders and debt collectors make mistakes in their reporting or fail to update your information. It could even be the result of identity theft.
To make sure your credit is ready to apply for a mortgage, review your credit report for errors in your personal information, e.g., your first and last names, addresses of places you’ve lived, names of employers you’ve worked for. Check each account listed in your credit report and highlight any that you don’t recognize, that are listed more than once, or that are closed but are still listed as open.
Late or missed payments
Consistently paying your bills on time is one of the most important things you can do for your credit score, so it’s important to watch out for late payments on your credit report, especially if they’re inaccurate. Report any incorrect, late or missed payments and ask the credit bureaus to remove any negative records over seven years old.
Credit utilization
Credit utilization refers to the amount of credit you're using compared to your credit limit. Keeping your credit utilization low can help you maintain a good credit score. Look for any accounts where you're using a high percentage of your available credit and consider paying them down.
Hard inquiries
Hard inquiries are requests for your credit report that occur when you apply for credit. Too many hard inquiries in a short period of time can have a negative impact on your credit score. Look for any inquiries that you don't recognize and follow up with the creditor to make sure that the inquiry is legitimate.
Public records
Check for any public records, such as bankruptcies, judgments, or liens, that appear on your credit report. These can have a significant negative impact on your credit score and should be addressed as soon as possible.
Does monitoring my credit affect my credit score?
No, credit monitoring does not affect your credit score. Credit monitoring is considered a soft inquiry because it is not related to opening a new line of credit or incurring new debt. Unlike hard inquiries, which occur when lenders check into your credit after you apply for a new loan, credit card, or line of credit, soft inquiries appear on your credit report but do not impact your credit score.
What should I do if I find errors on my credit report?
If you find an error on your credit report that you think may be a simple mistake in reporting, just reach out to the credit bureaus to dispute the information and request that they remove it.
However, if you suspect the incorrect information is the result of identity theft, you need to act fast. Ask the credit bureaus to block or remove the fraudulent charges and place a fraud alert on your account, then contact your bank and credit card issuers to request that they cancel the charges and restore the missing funds to your account immediately. You should still be able to dispute fraudulent charges and attempt to get them removed or your money back even if the charges have already gone through, especially if the fraudster used a credit card.
What can I do to help minimize future damage to my credit?
In addition to a fraud alert, you can try to minimize potential damage to your credit score by contacting the three major credit bureaus to request a credit freeze. Freezing your credit blocks inquiries into your credit record, which prevents cybercriminals from opening new credit accounts in your name. It’s completely free and easy to do, and the process of freezing/unfreezing can take as little as a few minutes.
When you want to unfreeze your credit again (for example, when you apply for a mortgage), you can do so by logging onto each individual credit bureau website using the same account you used to freeze it. If you don’t have access to the internet, you may also be able to freeze and unfreeze your credit by phone or by mail, provided you supply sufficient identifying information.
Like buying a house, getting married is one of the biggest decisions you can make in life — but does it affect your credit score? To learn more, check out how marriage can impact your credit.
What next?
Monitoring your credit is an important step in preparing to buy a house — but you don’t have to do it alone. Sign up for monthly triple-bureau credit monitoring and scores* from PrivacyGuard to help watch for changes in your credit scores and other sensitive information and track progress toward your goals.
* Your VantageScore credit score(s) are provided by VantageScore Solutions LLC. The VantageScore model, with scores ranging from 300 to 850, was developed jointly by the three major national credit reporting agencies - Experian®, TransUnion®, and Equifax®. The version of VantageScore provided by PrivacyGuard is used by some, but not all, lenders. Your score(s) may not be identical or similar to scores received directly from those agencies, from other sources, or from your lender. Trilegiant Corporation, Trilegiant Insurance Services, Inc., Alliance Marketing Association and their credit Information subcontractors shall not have any liability for the accuracy of the Information contained In the credit reports, credit scores, CreditAlert® reports or other reports which you receive In connection with the PrivacyGuard service, including any liability for damages, direct or Indirect, consequential or incidental