Buying a home is one of the biggest financial steps you can take, but a lost wallet, a data breach or an otherwise compromised account can rob you of the opportunity. Find out the best ways to avoid identity theft during Financial Literacy Month in April. Otherwise, you may have to recover your credit and good name before you can buy a home.
Identity theft can derail home buying because it damages your credit. Thieves can open credit cards and take out loans using your name and Social Security number.
Lenders run your credit as soon as you apply for a mortgage. They compare the amount of debt you carry to your earnings to determine how much you can borrow. Credit cards or loans opened by identity thieves and unauthorized use of legitimate accounts diminishes your buying power and can prevent home buying altogether.
Some lenders have minimum credit score requirements — such as 580 or 650 —depending on the type of loan you’re applying for. Lower scores may prevent you from getting an affordable loan to buy a home. Scores tend to fall when credit balances rise or new accounts are opened. Scores may also take a hit when loans or credit cards go unpaid for 30 days or more. This can happen for months before you’re aware there’s a problem when your identity is stolen.
Fraud and Your Funds
Home buying can take years of saving, but identity thieves can drain bank accounts in minutes. Typical down payments to buy a home can range from 3.5 to 20 percent of the home price, and closing fees may cost an additional 2 to 5 percent. Mortgage lenders generally don’t accept borrowed funds to buy a home — they must come from your own reserves.
Taxing Consequences of Identity Theft
Identity thieves can file taxes and even obtain your refund using your Social Security number. Mortgage lenders generally rely on your past two years’ income tax returns to calculate your earnings. They also verify your income directly with the Internal Revenue Service via an IRS transcript request.
When an identity thief files a fake return with your Social Security number, you may not know about it until you attempt to file your taxes. The IRS rejects an e-filed return or notifies you in writing that your Social Security number is already associated with a filed paper return. You must clear your tax file with the IRS before a mortgage lender will consider you for a loan.
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What’s In a Name?
Fraudulent use of your identity or Social Security number can cause your home purchase to fall through during the escrow process. The title insurance company, which insures a home’s title against errors, researches your personal information by way of your name, Social Security number and public records when you enter into escrow to buy a home5. This background check helps to ensure that you have no legal obstacles that could hinder a title company’s ability to insure you, such as back child support, liens or court judgments. Victims of identity theft must clear their names with the courts and the recorder’s office before a title policy is issued.
Do Your “Home” Work
Request free copies of your credit reports from the three major credit reporting bureaus, including TransUnion, when you’re preparing to buy a home. You’re legally entitled to a free report each year. Review all accounts and public records, and report unauthorized accounts and errors to one of the bureaus.
You activate a free fraud alert service when you report fraudulent activity to a credit bureau, and this notifies the other credit bureaus of potential identity theft. The fraud alert results in more thorough vetting when a lender is processing a new loan or credit application in your name. Fraud alerts last 90 days and may be renewed. An active fraud alert can slow down your mortgage approval if you’re in the process of buying a home.
Obtain free information and resources to prevent identity theft during Financial Literacy Month. Finance institutions and nonprofits around the country offer events and education to help you handle your money and debt.