Taking out a mortgage is a huge milestone for you—and your credit. For starters, building and maintaining the credit necessary to secure a mortgage is a big win. Taking care of your mortgage responsibly shows that you can manage various credit types, make on-time loan payments, and keep up a sizable, long-term account—all of which can eventually raise your credit score.
However, there are occasions when a mortgage could negatively impact your credit along the road, either by creating a small blip or more significant turmoil if you have trouble making your loan payments. Here are some of the highs and lows that getting a mortgage may cause for you and your credit.
A mortgage is a major financial commitment, and it’s natural to wonder how it will affect your credit score. The answer is a bit complex: it can both help and hurt your score, depending on your payment history and other factors.
The Initial Credit Score Hit
When you apply for a mortgage, the lender will perform a hard inquiry on your credit report This inquiry can temporarily lower your credit score by a few points. However, this is a temporary dip, and your score should rebound quickly if you make your mortgage payments on time.
Making Payments on Time
Making on-time payments is the most important factor in building a good credit score. Your mortgage payments account for a significant portion of your credit utilization, so consistent on-time payments can significantly boost your score.
Impact on Credit History
A mortgage can also help you get better credit by proving that you can responsibly handle a significant amount of debt. This is particularly advantageous if you have a short credit history or a variety of revolving debt, including credit card debt.
Missed Payments
However missing mortgage payments can have a severe negative impact on your credit score. Late or missed payments are reported to credit bureaus and can stay on your credit report for up to seven years significantly lowering your score and making it difficult to qualify for future loans.
The Bottom Line
Overall, a mortgage can be a valuable tool for building your credit score. You can gradually raise your credit score and prove that you are creditworthy by consistently paying your bills on time and managing your debt responsibly. However, it’s imperative to prioritize paying your mortgage on time and to be aware of the possible consequences of missing payments.
Frequently Asked Questions
How much will applying for a mortgage lower my credit score?
A: The exact amount your score will drop depends on several factors, including your existing credit score, the number of inquiries on your credit report, and the lender’s scoring model. However, the drop is typically small and temporary, ranging from a few points to a dozen or so.
Q: How long will it take for my credit score to recover after applying for a mortgage?
A: If you make your mortgage payments on time, your credit score should rebound within a few months. However, it may take longer if you have other negative factors on your credit report, such as missed payments or high credit utilization.
Q: How can I improve my credit score after getting a mortgage?
A: The best way to improve your credit score after getting a mortgage is to make consistent on-time payments. You can also focus on paying down other debts, keeping your credit utilization low, and avoiding opening new credit accounts.
Is it possible to maintain a high credit score while having a mortgage?
A: Absolutely! A mortgage can be a valuable tool for building your credit score, as long as you manage it responsibly. By making on-time payments and avoiding missed payments, you can demonstrate your creditworthiness and improve your score over time.
Additional Resources
- NerdWallet: How Does a Mortgage Affect Your Credit Score?
- Investopedia: How Your Mortgage Affects Your Credit Score
- Experian: How Mortgages Affect Your Credit Score
A mortgage can be a powerful tool for building or improving your credit score. By making consistent on-time payments and managing your debt responsibly, you can demonstrate your creditworthiness and unlock access to better loan rates and other financial opportunities. Remember, the key is to be mindful of the potential impact of missed payments and to prioritize making your mortgage payments on time.
A New Mortgage May Temporarily Lower Your Credit Score
Your credit score may slightly decline (usually by less than five points) if a lender inquires about your credit history and score as part of a loan application. However, since the impact is minimal and transient, it shouldn’t have a major negative impact on your credit score or influence a lender’s decision. Furthermore, rate shopping for a loan is recognized by credit scoring models as a wise financial decision, and they usually consider several inquiries made within a short period of time to be one single event.
Having said that, now is not the time to apply for credit that you do not absolutely need, like a refinance of your student loan or a new credit card. Save those applications for later, after the mortgage loan has closed and the house is yours.
Your lender will probably base its prequalification on a “soft” inquiry if you want to be prequalified even if you haven’t submitted a formal loan application yet so you can determine how much house you can afford. This type of inquiry does not affect your credit scores.
Once youve been approved for a mortgage and your loan closes, your credit score may dip again. Good news: Since youve already been approved for your home loan, this temporary drop may not matter much.
Since a new mortgage is a large, brand-new loan, why does it lower your credit score? Credit scoring models dont have evidence yet to show youll be successful at making your payments on time. Additionally, opening a new account reduces the average age of your accounts, which influences your credit score somewhat. If everything else is equal, this brief decline in your credit score ought to start to improve after a few months of timely loan payments.
How a Mortgage Can Hurt Your Credit
There is, of course, the other side to the story. If you have trouble repaying your mortgage on time, your credit score will almost certainly suffer. While it’s generally a good idea to pay your mortgage on time, the real damage to your credit usually happens a month or so after the missed payment. Most mortgage lenders extend a grace period of 15 days before theyll penalize you with a late fee. They will report a payment as late to the credit reporting agencies if it is thirty days or more past due.
Even one 30-day late payment can have a lasting effect on your credit. Payment history accounts for 35% of your credit score and is the biggest factor in its calculation. A late payment will appear on your credit report for seven years, though its effect diminishes over time. A single 30-day late payment is not as detrimental as several late payments or payments that are 60 or 90 days past due.
An unpaid mortgage that goes into foreclosure creates its own set of problems. In a foreclosure, multiple missed payments cause your mortgage to go into default. According to the terms of your loan, your lender may take possession of your belongings and sell them to recoup their costs. Your credit will be severely harmed by the missed payments that cause foreclosure—120 days or four consecutive missed payments are usually the norm. The foreclosure itself also becomes a negative item on your credit report. Worst of all, you lose your home and any financial stake you have in it.
Clearly, the best course of action is to avoid late payments and foreclosure. Get in touch with your lender if you anticipate having trouble repaying your loan at any point to find out what steps you can take to lessen the consequences and get your finances back on track.