What Happens To Your Credit After Taking Out A Mortgage?
Cathie Ericson8-Minute Read
March 29, 2022
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If you’ve started the home buying process, you know how important it is to have a solid credit report in order to obtain financing from a lender. But once you’ve achieved that goal, you might be wondering what happens to your credit after you buy a home.
Does buying a house help your credit or hurt it? Let’s find out how your credit score is affected.
Does Buying A House Help Your Credit?
For most homeowners, taking out a mortgage means taking on the largest sum of debt in their lives. Credit reporting agencies will penalize this new mortgage debt with a short-term ding in your credit score, followed by a significant boost after several months of regular, on-time payments.
In other words, taking on a mortgage loan can temporarily lower your credit score until you prove to your lender that you’re capable of paying it back. This involves making consistent, timely mortgage payments and being careful not to take on too much additional debt in the meantime.
Understanding Credit And Debt
Not all debt is the same. Let’s take a quick look at how credit works and why your mortgage will eventually become good debt.
In general, there are two different types of debt: installment loans, or installment credit, and revolving credit. The main difference is that installment credit is fixed; you have borrowed a finite amount and are making monthly payments toward that loan in order to pay it off. Types of installment credit include student loans, personal loans and your home loan.
Revolving credit is different because it entails a line of credit that’s open for you to use, like credit cards, where you’re making payments that fluctuate each month, whether it’s the minimum or something more.
In that way, revolving credit doesn’t require a plan to pay it off. You might be making payments, but you also can be adding new charges. With a mortgage loan, you have a set plan that will eventually result in the debt being paid in full, provided you keep the mortgage long enough to complete the pay-off plan.
That’s why a home loan will eventually help your credit history, as you make those payments consistently and whittle down the balance. Your credit card debt, on the other hand, can continue to climb, which is why it’s more apt to negatively impact your credit score.
How Having A Mortgage Affects Your Credit Score
Here is a more granular look at the path your credit score will take as you apply for a mortgage, receive one and then make reliable payments toward the balance.
Tracking The Credit Score Trajectory
According to FICO®, your credit score can slide by five points just by having your lender pull your credit. That’s because a credit check from an application is known as a hard inquiry. A soft inquiry occurs when you check your own credit or a lender with whom you already have a loan just takes a look to make sure you’re on target.
Then once you actually take out the home loan, your score can potentially dip by 15 points and up to as much as 40 points depending on your current credit. This decrease probably won’t show up immediately, but you’ll see it reported within 1 or 2 months of your closing, when your lender reports your first payment.
On average it takes about 5 months for your score to climb back up as you make on-time payments, provided the rest of your credit habits stay strong.
The Effect On Other Lines Of Credit
As your credit score takes this short-lived dip, you want to be wary of how it will affect interest rates on other types of loans you might be seeking, such as an auto loan. That’s because even though reliably paying off your mortgage month after month proves you’re a responsible borrower, that positive activity won’t yet be showing up and factored into any money moves you make now.
Therefore, you might want to wait until your credit score has time to recover before seeking another new loan. And by then, it might even rise, given the strength of a mortgage, potentially opening the door to even better rates than you might have qualified for before.
Good Credit Vs. Bad Credit – Does It Matter?
Of course, that journey can be different if your credit started out on the lower end. While there’s no hard and fast number at which you won’t qualify for a mortgage, in general, most lenders like Rocket Mortgage® look for a credit score of at least a 620 for a conventional loan. Otherwise, you might need to look into other types of loans for which you might qualify or be prepared to pay a higher interest rate.
Credit industry leaders like FICO®, VantageScore® and Experian® use slightly different measures to calculate credit scores. Below is a general guide to credit score rankings, according to FICO®.
- Exceptional: 800+
- Very good: 740 – 799
- Good: 670 – 739
- Fair: 580 – 669
- Poor: 579 and below
In other words, does having a mortgage help your credit score? Yes, eventually. You might just have to exercise some patience, accompanied by good spending habits, while you wait.
How To Raise Your Credit Score Faster After Taking Out A Mortgage
Once you’ve been approved for a mortgage, you’re ready to embark on the exciting ride of home ownership. You’ve also shown that your financial history is commendable, given how hard it can be to qualify for a mortgage in the first place.
But clean credit is important, and you’re probably ready for your credit score to recover, especially if you’re hoping to make another purchase or want to take out another credit card.
Fortunately, there are a few things you can avoid doing to improve your credit score. Getting your credit score back on track is not only a good sign for lenders but it helps enhance your overall financial wellness.
The list of “don’ts” includes the following:
- Missing a payment or making a late payment: Making on-time payments is the most important factor in your credit score, and the one that counts for the largest percentage when credit agencies are computing your score.
- Applying for a new credit card: A credit card request is another example of a hard pull, which will mar your credit score. Wait until your credit is fully recovered to take on any new credit, including an auto loan, in order to make sure you can qualify for the best rates and keep your score on an upward climb.
- Closing a credit card: Your credit history is one factor in the computation of your credit score. If you have a credit card you no longer use, especially if it’s one of the first ones you acquired, go ahead and keep it open – there’s no need to use it, or you can put one small recurring bill on it each month as long as you remember to pay it off. Maintaining the account will positively impact your score.
- Running up your credit cards: Another important factor in your credit score is your credit utilization, or how much of your available credit you have used. Even if you have a large line of credit, lenders prefer to see you only use a portion of it – around 30% for credit cards. That means if your limit is $1,000, it’s best to keep your spending under $300 and pay it off in full.
How Does A Mortgage Affect Your Credit Score?: FAQs To Consider
If you’ve applied for a home loan, you’ve probably been advised not to make any financial moves until your mortgage has been approved, including taking on more credit card obligations, quitting your job or buying a car.
The good news is that once you’ve signed the papers to close on your mortgage, it’s far easier to maintain it than it was to get it in the first place. The most important rule of thumb to remember is to make your mortgage payments (and all your other payments) on time, every time.
Here are a few other common questions about how your mortgage can affect your credit score.
How long does it take for credit scores to go up after buying a house?
There is no hard and fast rule for how long it’ll take your credit score to start improving – it can take anywhere from a few months to several years. On average, it can take about 5 months for your credit score to recover. Fortunately, your credit score may make incremental jumps during that time.
How long should I wait after closing to make another big purchase?
Taking out a mortgage loan can negatively affect your credit score temporarily. That’s why you’ll want to wait to make another purchase on credit until your score has risen again, in order to ensure you’re receiving the best terms and interest rate for your new loan. When you’ve taken on a responsibility as big as a mortgage, your future lenders want to make sure you have the ability to stay the course and maintain your financial wellness.
But aside from the potential impact on your credit score, it’s just fiscally sound to wait to make another purchase after you buy a home. New homeowners often find they are beset with a multitude of expenses and fees – from the origination fee and title insurance to routine property maintenance. So, it’s wise to be in your home for some time to make sure that you can capably pay the bills before assuming more debt.
How can I improve my credit score?
Qualifying for a home loan was the first sign you’re on the right path. But as you continue to strive to build your credit score, you might be wondering what factors impact it the most. Here is a breakdown FICO® shares of the model it uses to determine your credit score:
- Payment history (35%): Never miss a payment to receive the full effect of this hefty percentage.
- Credit utilization (30%): Keep your revolving credit under 30% for the best results. Remember that this number doesn’t take into account your installment credit, like your mortgage or a personal loan, as those will have set repayment terms.
- Length of credit history (15%): Keep those older accounts open, even if you’re not using them regularly.
- Credit mix (10%): This refers to the different types of revolving and installment credit you have, including credit cards, vehicle loans, student loans and your mortgage. Lenders like to see that you can manage different types of credit responsibly.
- New credit (10%): Lenders will take into account if you’re applying for new cards, which could signal that you’re planning a spending spree.
The Bottom Line
Obtaining a mortgage will affect your credit score, and while it might dip slightly at first, your credit score can improve by making consistent, timely mortgage payments every month.
Once your credit score is on the rise, you’ll likely see better terms and interest rates for future loans you take on. Are you looking to achieve a high credit score of 700 or more? Continue practicing smart spending habits to appeal to future lenders and enhance your overall financial wellness.
Rocket HQSM has partnered with CardRatings for our coverage of credit card products. Rocket HQ and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.
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