While buying a house, your credit score is very important to securing mortgage funding. But what about after you close on the sale? How will a home loan affect your credit? The good news is that in most cases, obtaining and paying a mortgage will actually help your credit score.
Initial Drop
Although making timely mortgage payments will improve your score over time, you may see an initial small drop in your credit score after you buy a home. This is because of the credit checks that were run during the application process. Each lender you apply with pulls your credit report with the three major credit reporting bureaus and uses the middle score to qualify you for a mortgage. Running your credit like this is called a hard inquiry and counts against your credit slightly. Fortunately, all credit inquiries of the same nature made within a 45-day period are counted as just a single inquiry, so you are not penalized for shopping around for the best mortgage rate. And even though your score may decline by a few points, it is only temporary.
Credit History
One of the biggest determining factors of your credit score is the length of your history with borrowed money. Most mortgage terms last between 15 and 30 years, so as long as you make your monthly payments on time, you are sure to see benefits to your score over that long period of time.
Credit Diversity
The credit bureaus also determine your score based on the type of credit you have and generally, the more diversified your credit accounts, the better. Mortgage debt is considered an installment loan, like a car loan that has an end date, whereas credit card debt is revolving credit that can be reused continually. Adding more installment debt with a mortgage if you have plenty of revolving credit could boost your score a few points.
Mortgages Get Reported
Your score could also increase because mortgage payments are automatically reported to the credit bureaus; rent payments are not. There are some instances where rent is reported and then considered in credit scores, but that is much less common. So, if you have been faithfully paying rent on time, it has likely not been counted towards your good credit. Once you get a mortgage, staying current on your payments will be recognized in your credit report.
Missed Payments
It is important to realize that your credit score will only improve with a mortgage if you make full, timely payments. Any late or missed payments will definitely hurt your credit. A lower score could hurt your chances of getting auto or business loans, and in some cases of getting the next new job.
Your credit report is all about helping lenders determine how likely you are to repay them and how risky it is to lend you money. Buying a home can be a boon to your credit score over time if you consistently make your mortgage payments on time.
If you're thinking about buying or refinancing a home please give us a call today.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.