Financial experts constantly warn consumers to keep their credit scores in tip-top shape if they’re planning to purchase a home in the near future. But it can affect your credit score going forward after you have the mortgage.
The higher your credit score, the more likely you are to get the best mortgage rates. A mortgage calculator can show you the impact that different rates can have on your monthly payment.
Key Takeaways
- Taking out a mortgage will temporarily hurt your credit score until you can prove your ability to pay back the loan.
- Improving your score after taking on a mortgage involves consistently making your payments on time and keeping your debt-to-income ratio at a reasonable level.
- Mortgages help your credit score by improving your mix of revolving debt and installment debt. This mix accounts for roughly 10% of your score.
The Initial Credit Score Hit
Your credit score is a numerical representation of your ability to pay back a debt obligation that you've taken on so you can expect your credit to suffer immediately after you get a new mortgage. Your score will go down until you prove that you have the ability to pay back the loan. You've taken on the largest loan obligation that most consumers will ever have, and you must actually make the payments as promised.
This temporary lowering of your score may make it difficult for you to get other loans or at least to get a loan with ideal credit terms. Plan to wait at least six months before applying for any loan of significant size.
A mortgage is the pinnacle of consumer credit, You’re considered a trustworthy borrower if you can qualify for a mortgage.
Making Payments on Time
Making on-time payments every month can bring your score back up to its pre-mortgage level. Don’t sign up for those services that say they can raise your credit score fast. Simply make your mortgage payments and all other payments on time. Your score will naturally rise over time as you prove that you’re a responsible borrower.
Pay your bills on time and in full. Set up automatic payments through your bank or with your creditors so you never forget if your busy lifestyle sometimes forces paying bills lower on your priority list.
35%
The percentage of your score that represents your payment history, according to FICO.
Impact When Building Your CreditHistory
Your credit report measures your ability to pay back debts. You only earn so much money, so keeping your amount of debt in good proportion to your income is essential. This is called your debt-to-income ratio.
Keeping your ratio no higher than 36% with no more than 28% going to your mortgage is considered ideal. Don’t take on other debt obligations if you know you'll purchase a home in the near future so you can keep your debt-to-income ratio reasonably low.
But you do want to continue building your credit history. A little credit is better than no credit and, of course, paying your mortgage on time is good for your credit history.
Missing Payments on Your Mortgage
The exact calculation of your credit score is a bit of a mystery. FICO publishes general guidelines to help consumers understand their scores but nobody knows the specifics of the calculation. The types of loans you have do play a role in your score, however.
Your score won't be as high if your credit report contains nothing but a bunch of credit card loans. A mix of revolving debt to installment debt such as your mortgage accounts for about 10% of your score.
The effect on your score won't be massive if you pay a credit card a little late, but expect your credit score to reflect the misstep if you don’t make your mortgage payment on time. Make the payment as soon and as quickly as possible if you do miss one. Your mortgage company may not report it to the credit bureaus if your payment is just a little late.
What Can I Do to Prevent My Credit Score From Dropping?
Of course, you'll want to continue to pay all your credit obligations on time and it's generally not a good idea to take on other, additional debt if you plan to apply for a mortgage in the near future. But you'll also want to avoid even applying for other debt, particularly in a short period of time, because this can affect your credit score as well.
How Can I Find Out What My Credit Score Is?
You can simply ask your potential lender what it is if you've already applied for a mortgage. Or you can also reach out to FICO for a copy of your credit report, your credit score, and score monitoring if you want to know what it is in advance of applying for a mortgage. It will cost you from $19.95 to $39.95 a month as of July 2023, but this generally includes updates every month so you can keep track of how things are going.
What Is a Poor Credit Score?
The exact number depends on which agency is reporting your score: FICO or VantageScore. In both cases, a "very poor" score falls into a range. Both agencies begin with a low of 300. VantageScore says your score is very poor from this number up to 499. FICO increases this number all the way to 529. A "poor" score is generally considered to be anything under 600.
The Bottom Line
Debt that you take on for a home is considered responsible debt as long as you pay your mortgage on time every month. Try to avoid making any other major purchases within six months of taking on a mortgage because your credit score will likely drop from the process of getting the loan.
A history of responsibly paying your mortgage and other bills should bring your score back up. But one of the best credit repair companies may be able to undo some of the damage should unavoidable circ*mstances lead to multiple late payments, further damaging your score.
FAQs
Taking out a mortgage will temporarily hurt your credit score until you can prove your ability to pay back the loan. Improving your score after taking on a mortgage involves consistently making your payments on time and keeping your debt-to-income ratio at a reasonable level.
How does a mortgage affect your credit score? ›
Getting a mortgage can cause a temporary dip in your credit score. But consistent, on-time mortgage payments can elevate it again, and even improve your score. Late mortgage payments will harm your credit score, and they'll stay on your credit report for up to seven years.
How much does a mortgage credit pull affect your score? ›
In general, credit inquiries have a small impact on your FICO Scores. For most people, one additional credit inquiry will take less than five points off their FICO Scores. For perspective, the full range for FICO Scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history.
Does your mortgage show up on your credit report? ›
If a reaffirmation agreement is not signed, your mortgage may not appear on your credit report. Delay in reporting: It typically takes 30 to 60 days after you sign your mortgage paperwork for it to appear on our credit report. Processing delays during busy seasons could delay this even longer.
What is the number one thing that affects your credit score the most? ›
Most important: Payment history
Your payment history is one of the most important credit scoring factors and can have the biggest impact on your scores. Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them.
Why did my credit score drop 100 points after buying a house? ›
Why did your new mortgage drop your credit score by 100 points? Your new mortgage can cause your score to drop because it's a new account and likely a significant debt added to your credit history. Once you establish a positive payment history, your score will likely increase.
How to get 800 credit score? ›
Making on-time payments to creditors, keeping your credit utilization low, having a long credit history, maintaining a good mix of credit types, and occasionally applying for new credit lines are the factors that can get you into the 800 credit score club.
What is the secret way to remove hard inquiries? ›
If you find an unauthorized or inaccurate hard inquiry, you can file a dispute letter and request that the bureau remove it from your report. The consumer credit bureaus must investigate dispute requests unless they determine your dispute is frivolous.
How to remove hard inquiries in 15 minutes? ›
If you identify an unauthorized hard inquiry, here's a detailed approach on how to remove hard inquiries in 15 minutes:
- Dispute with the Credit Bureau: Initiate a dispute online or via mail. ...
- Contact the Creditor: Engage with the lender or creditor responsible for the inquiry. ...
- Safeguard Your Credit:
If you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. The credit-scoring model recognizes that many consumers shop around for the best interest rates before purchasing a car or home, and that their searching may cause multiple lenders to request their credit report.
How many points could a mortgage raise my credit score? It's hard to say exactly how much paying your mortgage every month will improve your credit score. The amount of time you've had the mortgage and your current balance affect how much your score might improve.
Will mortgage lender affect my credit? ›
Credit checks coming from lenders are reported to the credit reporting companies as an “inquiry.” An inquiry typically has a small negative effect on your credit scores. Inquiries can be seen by other lenders when they check your credit.
How long does it take for a mortgage to hit your credit? ›
However, it generally takes 30 to 60 days for a new or refinanced mortgage account to show up on your credit report. At times when a lot of people are buying homes or refinancing, it could take up to 90 days.
What brings your credit score up the fastest? ›
4 tips to boost your credit score fast
- Pay down your revolving credit balances. If you have the funds to pay more than your minimum payment each month, you should do so. ...
- Increase your credit limit. ...
- Check your credit report for errors. ...
- Ask to have negative entries that are paid off removed from your credit report.
Highlights:
- Even one late payment can cause credit scores to drop.
- Carrying high balances may also impact credit scores.
- Closing a credit card account may impact your debt to credit utilization ratio.
Paying your bills on time is the most important thing you can do to help raise your score. FICO and VantageScore, which are two of the main credit card scoring models, both view payment history as the most influential factor when determining a person's credit score.
How long does it take for a paid-off mortgage to show on your credit report? ›
It can take 30 to 60 days for a lender to report a loan account closure to the credit bureaus, so there may be a few months' lag between when you make your last payment and when your credit reports are updated to reflect it.
Does a mortgage count as debt? ›
Is a mortgage considered debt? A mortgage is a type of secured debt because the real estate you're financing is used as collateral against the loan. Non-mortgage debt is any other type of debt that's not secured by real estate, such as personal loans, student loans, auto loans and credit cards.
How many times does your credit get pulled when buying a house? ›
An initial credit inquiry during the pre-approval process. A second pull is less likely, but may occasionally occur while the loan is being processed. A mid-process pull if any discrepancies are found in the report. A final monitoring report may be pulled from the credit bureaus in case new debt has been incurred.
