Once you confirm that your credit score is high enough to be approved for a mortgage, the purchase lowers your score. This decline averages 15 points, but some customers may experience a 40-point decline in their score, per a recent LendingTree study.
Tendayi Kapfidze, chief economist at LendingTree, stated, “You can have a bigger decline if you have high utilization on credit cards or other credit lines and then take a relatively large mortgage relative to your income and credit history.” Gary Burchell | Getty s.
The research examined the credit ratings of over 5,000 individuals who obtained a mortgage in the years 2015 and 2016. After buying a home, scores typically took 160 days on average to reach their lowest point and an additional 161 days on average to return to previous levels (almost 11 months in total).
Credit-reporting firms — i. e. , Equifax, TransUnion, Experian — consider your overall debt burden as part of their calculation for your number. They also consider how well youve managed past debt, including whether you made payments on time. Generally speaking, the higher your score, the better terms you can get on a variety of consumer debt.
Therefore, even though getting a mortgage lowers your credit score, you might have to pay more for other loans like credit cards or auto loans.
“You might want to wait before taking on other credit obligations, if your score drops,” Kapfidze said.
Buying a home is a significant milestone in anyone’s life, but it can also come with a temporary dip in your credit score. While the thought of a lower credit score might seem daunting, it’s important to remember that this impact is usually short-lived and can be mitigated with responsible financial management.
In this comprehensive guide we’ll delve into the intricacies of how mortgages affect credit scores, exploring the factors that contribute to the decline and the strategies you can employ to minimize the impact and even improve your score over time.
Understanding the Impact of Mortgages on Credit Scores:
When you apply for a mortgage, lenders perform a hard credit inquiry, which involves pulling your credit report from all three major credit bureaus (Experian, Equifax, and TransUnion). This inquiry can result in a temporary decrease in your credit score, typically around 5 points.
However, the bigger impact comes after you close on your mortgage. The addition of a new, large debt to your credit report can cause your score to drop further, potentially by 15-40 points. This decline is primarily due to the increased credit utilization ratio, which measures the amount of credit you’re using compared to your available credit.
Factors Influencing the Credit Score Drop:
Several factors can influence how much your credit score drops after buying a house including:
- Your initial credit score: If you have a high credit score to begin with, the impact of a mortgage might be less significant.
- The size of your down payment: A larger down payment means you’ll be borrowing less money, which can minimize the impact on your credit utilization ratio.
- Your existing debt: If you have a lot of outstanding debt, adding a mortgage can further increase your credit utilization ratio and lead to a more significant score drop.
- Your credit history: A history of responsible credit management can help mitigate the impact of a new mortgage on your score.
Strategies for Minimizing the Impact:
While a temporary dip in your credit score is inevitable when buying a house, there are steps you can take to minimize the impact and even improve your score over time:
- Make timely mortgage payments: This is the single most important factor in maintaining a good credit score. Late payments can significantly damage your score.
- Pay down other debts: Reducing your overall debt can improve your credit utilization ratio and boost your score.
- Avoid opening new credit accounts: Applying for new credit cards or loans can lead to additional hard inquiries, further lowering your score.
- Become an authorized user on a credit card with good credit history: This can help improve your credit score without taking on any new debt.
- Monitor your credit reports regularly: Check for errors or fraudulent activity that could be negatively impacting your score.
Recovering Your Credit Score After Buying a House:
The good news is that the impact of a mortgage on your credit score is usually temporary By consistently making timely payments and managing your credit responsibly, you can expect your score to recover within a year or two. In fact, maintaining a good payment history on your mortgage can even help improve your credit score over time.
Buying a house is a significant financial decision, and understanding the impact it can have on your credit score is crucial. While a temporary dip is inevitable, responsible financial management can minimize the impact and even help you improve your score in the long run. By following the strategies outlined above, you can ensure that your dream of homeownership doesn’t come at the expense of your credit health.
Cities with fastest credit score recovery post-mortgage
| City | Average initial credit score | Average decline in score | Total days until recovery |
|---|---|---|---|
| 1. Richmond | 693 | 13 | 266 |
| 2. Minneapolis | 701 | 11 | 267 |
| 3. Salt Lake City | 704 | 15 | 272 |
However, keep in mind that, according to LendingTree, it may take several months for your lender to notify credit-reporting companies that you have a mortgage.
Credit scores range from about 300 to 850, with scores above 700 considered good or excellent. Someone with a fair credit score that falls between 580 and 669 will pay about $45,000 more in interest over their lifetime on loans and credit cards versus a consumer with very good credit score of 740 or higher, according to separate research from LendingTree.
How Much My Credit Dropped After Buying A House | Credit For Beginners
FAQ
How much does buying a house drop your credit score?
Why did my credit score drop 100 points after buying a house?
How long after buying a house does it show on credit report?
Does owning a home lower your credit score?
Does your credit score drop when you get a new mortgage?
Once you’ve been approved for a mortgage and your loan closes, your credit score may dip again. Good news: Since you’ve already been approved for your home loan, this temporary drop may not matter much. Why does your score drop when you get a new mortgage?
What is the average drop in credit score?
The average drop in credit score is 15 points, though some borrowers could see it drop as much as 40 points, if they already have a lot of debt. Since you’ll be taking on a huge new loan, you’ll want to hit the pause button on opening any other lines of credit until your score bounces back.
What happens to your credit score when you buy a home?
In fact, within a few months, barring any other issues, your credit score will likely be higher than it was before you first applied for a mortgage. When you buy a home, it’s important to be prepared for your credit score to temporarily drop. This happens any time you pick up a new credit account.
Will a mortgage affect my credit score?
Applying for mortgages will ding your credit a bit, but actually opening a mortgage will cost even more points, especially if this is your first home loanmortgage. The large increase in overall debt will definitely cause a drop in your credit score.