Check Your Credit Report Before Applying for a Mortgage

I don't share many personal financial stories on this website. But this is one area where it's warranted. My wife and I recently checked our credit reports because we are planning buy a home soon. We found some items on her report that should not have been there, and it was hurting her credit score. This story shows why you should always check your credit reports several months before applying for a mortgage loan.

An Introduction to Credit Reports

We have dozens of articles on this website that explain where your credit reports come from, what information it includes, etc. So I'm not going to repeat it all here. But I do want to give you a quick primer on how the credit-reporting industry works.

If you have ever taken out a loan or signed up for a credit card, you should have a credit history. For most people, this history begins when they apply for their first loan or credit card. From this point forward, many of your financial activities will be added to your credit history.

These histories are referred to as credit reports, and you actually have three of them. There are three credit-reporting companies that operate in the United States. They are TransUnion, Equifax and Experian. These are entirely separate companies, and they maintain unique data. So your credit reports might vary slightly from one company to the next.

Your credit score is something different. There are different types of scores, but the one you should be most concerned about is your FICO credit score. When you apply for a mortgage loan, the lender will use this score to determine the level of risk you bring the table. They will consider other aspects of your financial background as well. But the FICO credit score is at the top of the list. It can make or break your chances of getting approved for the loan. It also influences the interest rate you get from the lender.

This is why it's so important to check your credit reports before applying for a mortgage loan. If you missed the connection between these two things, here it is again...

Credit reports contain information about your repayment of debts. This information is used to produce a FICO score that ranges between 300 and 850. You have three scores -- one for each of the reporting companies mentioned above. Mortgage lenders will use these scores when considering you for a loan. A low score can hurt your chances of getting approved for the loan, and it may cause the lender to assign a higher interest rate as well. A higher score helps you qualify for a mortgage. See how it all ties together.

Check Your Credit Sooner Rather Than Later

With that introduction out of the way, let me get back to the personal story I promised to share. This story illustrates why it's so important to check your credit reports before buying a home.

My wife and I have been through the home-buying process several times in the past, so we are very familiar with it. We realize the importance of keeping a clean credit history. So we checked our credit reports and scores before getting pre-approved for a mortgage loan. We wanted to know two things.

  1. We wanted to know what our credit scores were, so we would have more bargaining power with lenders.
  2. We wanted to make sure there wasn't any erroneous information on our credit reports. This kind of thing can hurt your score.

Sometimes you can have negative items on your credit report that you never even knew existed. It happens all the time. That was the case with my wife. We checked all three of our reports through AnnualCreditReport.com, which is the website I recommend using.

I'm not trying to sell you anything here. I recommend this website because it is the only one that is regulated by the federal government.

This is the official website for obtaining your free credit reports from all three reporting companies. If you go anywhere else, they will probably try to sell you some kind of credit-monitoring or identity-theft protection service. If you only want to check your credit reports, you should do it through the website mentioned above.

When I checked my reports, I was happy to find that there were no negative items on any of them. This means that no one has ever reported me for late payments, unpaid debt obligations, etc. This is a good thing. It shows mortgage lenders that I have a history of paying back my debt obligations. Obviously, this is something the lender wants to know. And even if they don't review the individual line items in my credit reports, this positive trend will show up in my credit score. In fact, your payment history affects your FICO credit score more than any other single factor.

This was true in my case as well. For example, my Equifax report said my payment history was "very good." Some of my other categories were labeled as "above average." But when I checked my Equifax credit score, I found that it was in the "excellent" category. It was close to 800, which is an excellent credit score by any measurement.

I don't tell you this to brag. I just want you to know how important your payment history is when it comes to your FICO score. I was rated as above average in other categories, but my payment history got a higher rating of "very good." This lifted me up to the excellent credit-score range. This is a big deal when applying for a mortgage loan. Having good credit will increase your chances of getting approved for the mortgage, and it will also help you secure a lower interest rate. So not only do you get the loan, but you also save money by paying less interest on it.

Finding Negative Items On a Report

My wife was not as "lucky" as I was. She checked all three of her reports as well, and she came across a negative item that appeared on all of them. We were surprised by this, because we are pretty anal about paying our bills on time. How could this be?

We examined the report and found out that Capital One had reported her as being late on some credit card payments. Immediately, my wife recalled what had happened.

She started off with a slew of colorful phrases that I cannot repeat here. When she was done with that, she reminded me of a problem she had with Capital One in the past.

Long story short, she had called to close an account, and they tried to stick her with some interest charges after she'd closed the account. She did the diligent thing by getting her current balance so she could close the account properly. But then a couple of weeks later, she logged into her account to make sure it was closed and found that there were various interest charges and penalty charges. This is a game credit card companies used to play when their customers would try to close an account. I think the Credit CARD Act has since made this type of thing illegal, but don't quote me on that.

As a result of this one negative item, my wife's credit scores were lower than mine. Late payments and missed payments can really hurt your scores. Granted, this was the only negative entry on a long credit history, so it didn't cause a lot of damage. But it still bumped her from the "very good" category down to the "above average" category. And that kind of thing can result in a lower interest rate on the mortgage loan. So she disputed the error as soon as she found it, to try and have it purged from her reports.

The Moral of This Story

The details of our credit histories are not the focus of this article. The point I'm trying to make is that you need to check your credit reports at least a month before applying for mortgage loan. If you find erroneous items on your reports like we did, you can dispute it through the reporting company that produced a report. If the erroneous item is on all three of your reports, then you'll have to dispute it three times.

When you dispute a negative entry, the credit-reporting company must investigate it in a timely manner. This is actually required by federal law. You can learn about it by researching the Fair Credit Reporting Act, if you are so inclined. If their investigation supports your dispute -- or if they can't make a determination one way or the other -- they are required to remove the negative entry from your credit report.

But this process takes time. Depending on the nature of the disputed item, it might take several weeks to get it off your credit reports. This is why I urge you to check your reports before you start the mortgage application process.