Experian, TransUnion and Equifax now offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com.
In this article:
Every mortgage lender has its own unique protocols when it comes to background checks, but most perform a check of some type to verify your loan eligibility. Before lenders give your loan the stamp of approval, they'll want to make sure you meet their lending criteria and are capable of repaying the balance.
Mortgage lending is a deeply involved process that typically requires a close examination of the borrower's financial life. Of course, it could be well worth it if you ultimately find a house you can call a home.
Here's an in-depth look at how most mortgage lenders approach background checks.
What Lenders Review During a Mortgage Background Check
When processing your mortgage application, the lender will be on the lookout for any red flags that could suggest you're a risky borrower. Some important details include:
- Your employment status: Your mortgage lender will likely want confirmation that you've been steadily employed for at least two years. It isn't enough to simply provide your recent paystubs, though that's often required too. A mortgage lender may contact your employer directly to verify your work status. Things can be a bit more involved for self-employed homebuyers, who still need to prove a two-year history of uninterrupted income. Every underwriter is different, but you may be asked for additional documentation such as profit and loss statements or 1099 forms.
- Your financial information: Mortgage companies look at all sources of income. This can include money coming in from side gigs and alimony, as well as investment income in the form of dividends and interest. Passive income, like money generated from a rental property, will be considered as well. Be prepared to provide documentation to verify all income sources. Keep in mind that to qualify for a conventional mortgage, your new monthly payment will likely have to be at or below 28% of your gross monthly income.
- Your criminal record: Your mortgage lender may or may not choose to conduct a criminal background check. If they do, there unfortunately aren't any legal protections in place to prevent them from charging you a higher APR or denying your loan application due to past criminal activity. That said, many lenders are most concerned about an applicant's employment status, financial health and ability to repay their loan. If you meet all their lending requirements, having a criminal record may not be an issue. If you've recently been incarcerated, however, you'll have a gap in your employment history and income that could work against you.
Other Factors Lenders Check During the Mortgage Process
When applying for a mortgage, you can also expect a close examination of the following:
Your Credit Reports and Scores
A few months before applying for a mortgage, it's a good idea to review your credit reports. You can view your credit reports for free from all three major credit reporting agencies at AnnualCreditReport.com.
To get your credit ready for a mortgage, read your credit report like a lender would. Are there any past-due accounts or items in collections? How high are your account balances relative to your credit limits? The latter is important because it shapes your credit utilization rate, a highly weighted factor in your credit scores. Keeping balances low can boost your credit scores. Your debt account balances also factor into your debt-to-income ratio (DTI), which is crucial to mortgage companies. Your DTI shows how much of your monthly income is going toward debt payments. A higher ratio may suggest that you're not financially capable of taking on a mortgage payment.
In terms of the minimum credit score to qualify for a mortgage, you'll likely need a FICO® Score☉ of 620 or above for a conventional mortgage. Borrowers seeking an FHA loan can get approved with a score as low as 500, but will be required to put down at least 10%. Those with a minimum credit score of 580 can make a down payment as low as 3.5%. To assess your creditworthiness, mortgage lenders use specialized FICO® Scores that are focused on mortgage lending. You can view the FICO® Scores commonly used in mortgage lending with an Experian CreditWorks℠ Premium membership.
Your Bank Statements and Pay Stubs
Most lenders will examine your bank statements and recent paystubs to make sure you can afford to make your monthly payment and have the funds to cover all your mortgage fees—including your down payment and closing costs. They'll also want to substantiate your deposits to confirm that you aren't using a loan to cover any of these expenses. If you are, that will increase your DTI, which could affect your loan eligibility.
Relevant Tax Documents
Mortgage lenders often use a variety of sources to verify your income. Be prepared to provide two years' worth of signed federal tax returns and W-2 forms. These documents can disclose income sources that go beyond your regular paycheck, like money generated from an investment property or stock dividends, for example. Mortgage lenders can also use these documents to determine a self-employed applicant's average income.
Factors That Lenders Don't Check
There are certain off-limits criteria that mortgage lenders cannot consider when making a lending decision. Per the Equal Credit Opportunity Act (ECOA), it is illegal for a mortgage lender to discriminate based on your:
- National origin
- Marital status
Borrowers also can't be discriminated against for receiving income from public assistance programs. If your application is denied, mortgage lenders are legally required to provide their reason for doing so. Violations of the ECOA can be reported to the Consumer Financial Protection Bureau.
How to Prepare for a Mortgage
If you're hoping to secure a mortgage in the near future, there are certain steps you can take to increase your odds of getting approved. The following tips can help improve your credit score and put you in a stronger borrowing position:
- Pay down your debt.
- Bring any delinquent accounts into good standing.
- Make your payments on time every month.
- Avoid making major purchases or applying for new credit before completing the mortgage application process.
- Check your credit report and dispute any fraudulent activity.
Seeking a less expensive property or saving up a larger down payment can also make you a more attractive loan applicant and save you money on your loan. Similarly, it's usually wise to hold off on making any risky career moves or transitioning to self-employment if you plan on applying for a mortgage in the next two years.
The Bottom Line
Surprises are rarely welcome during the homebuying process, and opting for free credit monitoring with Experian can help you avoid them. Experian's services alert you to new activity on your credit report so you can take action if need be. Strengthening your credit before you submit your mortgage application could make you a more attractive buyer in the eyes of a lender and help you secure better terms on your loan.