How Getting a Mortgage Affects Your Credit Score
Having a good credit score is important for major life purchases like mortgage. But what a lot of people don’t realize is the reverse: getting a mortgage affects your credit score. Here’s why.
Each credit score inquiry and loan application may hurt your credit score, so many people wonder whether getting a mortgage is actually good for them. This is not an unwarranted fear. However, the degree to which you worry might be unwarranted.
Overall, there are some potential negative ramifications. Getting a mortgage affects your credit score. At first, you may see a small decrease, but over time your credit score will rise beyond where you started.
What your credit score is made out of
First, it’s important to understand that your credit score is made up of five areas:
- Payment History (35%) Whether you pay your bills on time and how much you pay them off every month.
- Debt (30%) How much debt you have versus the credit limit and original loan amount.
- Length of Credit History (15%) Based on your age, the age of your accounts and the age of each individual account on your credit report.
- New Credit (10%) If there’s any new credit such as a newly opened credit account.
- Credit Mix Lenders want to see that you were able to handle many types of credit responsibly. Having a good mix of credit including an auto loan, credit card, and a mortgage will help.
How your mortgage may lower your credit score
The mortgage itself will add a credit application inquiry to your new category credit. Once you have a loan, it will count as a new account. Only inquiries from the past year are considered with your credit score. So, that negative impact of checking your credit won’t last for very long.
You might be worried about these inquiries, because naturally you’ll want to shop around to find the best interest rate. There’s a special rule for this particular case. If you apply for more than one mortgage in a two week timeframe, so as to find the lowest interest rate, it only counts as one inquiry. Therefore, you don’t have to worry about shopping around trying to find the best rate. Just make sure you do it quickly within those two weeks.
The new mortgage will also hurt the category of “length of credit history.” So, at first, the mortgage will likely lower your credit score. However, the mortgage will eventually it will look like much less of a new account.
How your mortgage may increase your credit score
For all that negativity, there are also positive impacts, particularly long-term. In fact, getting a mortgage can help all five categories that comprise your credit score.
Provided that you make every monthly payment on time, your payment history category will start to take care of itself. With time, the amount you open your mortgage relative to the original amount you borrowed begins to lessen.
What’s more, with time the mortgage starts to become more of a positive factor in your length of credit history category. It will not stay in the new credit area for very long. Finally, if you’ve never had a mortgage before, getting a mortgage for the first time I have an immediately positive impact on your credit next category. While this category does only account for 10% of your total credit score it can still help you.
Parting thoughts and takeaways
The only way to know how your credit score is going to be impacted is to know what the formula for your credit score is. You might find that on average, your credit score dropped by 20 points when you first buy a home. Yet, it will start to rise after the first few months. After one year, your credit score will more than likely be higher than it was before you took out the mortgage. The reason for this is that, as discussed, the negative impact is immediate but after the first year or so all that negativity becomes a more positive impact.
That said, the most likely impact on your credit score when you take out a mortgage will be minimal but negative at first. With time, it will become much higher and much more positive. As a result, the overall long-term positive benefits will surely outweigh the short-term negative impact. If you’re still worried, you can speak with a credit specialist from a reputable credit repair company. They will be able to assist you in determining how your credit score will change after taking out a mortgage.