Identity Theft : Getting Mortgage-Approved When Your Credit Is Stolen

Lenders Have Rules In Place For Credit Theft Victims

If you’re an identity theft victim, getting a mortgage will be harder, but not impossible.

More than 17 million Americans — seven percent of adults — experienced at least one incident of identity theft in 2014, according to the U.S. Bureau of Justice Statistics. That number is sure to be higher today.

Identity theft is, unfortunately, a part of life in the information age. But mortgage lenders understand this fact and employ special guidelines in these situations.

Mortgage applicants do not have to forego homeownership plans due to wrecked credit, but proactive response to any incident is important.

Learn how lenders deal with identity theft, and know your options as you apply.

Report Identity Theft Immediately

To have any credibility as a victim, you have to report the incident to your local police and to the government.

For lenders to consider you an identity theft victim, you must:

• Provide a copy of a police report
• Complete an affidavit of identity theft available from the Federal Trade Commission
• Write a letter of explanation

It’s also a good idea to send your documents to all three major credit bureaus — Equifax, TransUnion and Experian — and place a fraud alert on your reports.

Lenders must personally contact you to ensure you are the one applying for credit, when a fraud alert is in place.

Get Approved Via “Manual Underwriting”

Once you’ve established that you’re an identity theft victim, lenders can “manually underwrite” your loan file, rather than running it through a computerized automated underwriting system (AUS).

Manual underwriting means a human goes through your credit report and application line-by-line and applies “make sense” guidelines. For example, if your credit history has no major blemishes prior to the identity theft, it’s easier to make the case that you’re a good risk.

The AUS, though, may not issue an approval due to poor, albeit erroneous, information.

Manual underwriting by a human allows lenders to be more flexible when identity theft is involved, but manually-underwritten loans often have tighter eligibility criteria.

For instance, the lender may require lower debt-to-income ratios or larger downpayments than they would if underwriting a file via the computerized system.

Still, a human-generated approval could be a good solution for well-qualified applicants.

Getting Around Credit Score Minimums

Most mortgage programs have minimum credit score requirements, and if they don’t, the lender will impose them.

This can be a major problem: identity theft victims can see their credit scores plummet when the thief opens accounts and doesn’t pay them.

Fannie Mae, Freddie Mac, and government mortgage agencies have different ways of dealing with the credit score requirements.

FHA loans

The U.S. Department of Housing and Urban Development, the overseer of the FHA program, says that applicants must include identity theft affidavits or police reports to dispute fraudulent charges.

The fraudulent accounts can then be excluded from the application.

USDA home loans

Likewise, USDA loan guidelines state that lenders can exclude credit data that is “significantly inaccurate.”

The agency instructs its lenders: “If an applicant does not have a usable credit score in connection with their loan request, then the use of non-traditional credit references is acceptable.”

Non-traditional credit reports are built manually and can include history from utility companies, landlords and other accounts that may not normally be reported to credit bureaus.

VA mortgages

The Department of Veterans Affairs, administrators of the VA home loan program, do not state a minimum credit score for the program. This makes it easier for identity theft victims to get around an inaccurate score if their “real” credit history is acceptable.

However, most VA mortgage lenders impose minimum credit scores. You’ll need to prove you were a victim of credit theft and also work to remove the erroneous information.

Conventional loans

Conventional loan rule makers, Fannie Mae and Freddie Mac, also address identity theft situations.

Freddie Mac says, “For a FICO score to be usable, it must be based on sufficient, accurate information. Too little information, or information that is significantly inaccurate, make the FICO score unusable for mortgage underwriting.”

Fannie Mae’s position is similar: “Lenders are obligated to take action when contradictory, derogatory, or erroneous information would justify additional investigation or would provide grounds for a decision that is different from the recommendation DU delivers.” DU, or Desktop Underwriter, is Fannie Mae’s automated underwriting system.

Talk with your lender about your options based on the home loan for which you apply. There is a good chance there is a workaround available to you.

You Might Pay Higher Interest Rates

Identity theft victims can end up paying higher mortgage rates, unfortunately. That’s because for many programs, borrowers with better credit scores get discounted loan fees, while those with lower scores pay more.

Typically, government-backed mortgage programs are less likely to impose higher fees on lower-score applicants.

Applicants with diminished credit should try a process known as a rapid rescore, which can raise your credit score by more than 100 points in days, not months or years.

Use A Rapid Rescore To Delete Erroneous Credit

If you have written proof that your derogatory credit history is the result of identity theft, you can ask your lender to use a rapid rescore.

Rapid rescoring is a service available only through lenders — you can’t initiate it on your own.

For $25 to $50 per account, a rescoring service will verify your accounts and remove inaccurate derogatory information, usually in just a few days.

You will need to gather all available documentation regarding the identity theft and submit it to your lender, who will then request the rescore for you.

Your cleaned-up report includes a score unaffected by the identity thief’s fraudulent accounts. If you need a mortgage in a hurry, and you have written proof that your bad credit history is invalid, this is probably the best way to get a mortgage after identity theft.

What Are Today’s Rates?

Mortgage rates are low, and it’s an ideal time to take advantage of low payments, even if you are a victim of credit-related crime. Today’s consumer protections make it easier than ever to qualify despite erroneous credit information.

Get a quote from a lender now. No social security number is required to start, and your information is transferred securely to a knowledgeable lender who can answer your questions.