How getting and paying your mortgage affects your credit score
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When you get a mortgage to buy a home — and as you pay it down over time — there’ll be some impact to your credit score. Here’s what to expect.
When you apply for a mortgage
To qualify you for a loan, many mortgage lenders look at your FICO credit score. FICO scores are calculated by:
- Payment history (35 percent)
- Amounts owed (30 percent)
- Length of credit history (15 percent)
- Credit mix (10 percent)
- New credit (10 percent)
To get preapproved for a mortgage, the lender typically pulls your credit report. This registers as a hard inquiry, which slightly affects your FICO score. The more inquiries you have that aren’t mortgage-related (think a new credit card or a car loan), the greater the adverse impact. However, if you’re getting more than one preapproval, the FICO scoring model groups all mortgage-related inquiries initiated within a 45-day window into a single inquiry to minimize the impact.
“Applying for and receiving a mortgage loan might create a brief and temporary dip in your credit score, as lenders are inquiring about your credit history and as your overall debt increases, but this is nothing to be afraid of,” says Tabitha Mazzara, director of Operations at MBANC (Mortgage Bank of California).
If you’re concerned about changes to your score as you compare loan offers, consider getting prequalified instead of preapproved. A prequalification usually only counts as a soft inquiry on your credit report, so it won’t affect your score, and it can help determine your approval odds, how much house you can afford and the rates you might qualify for. Be sure to confirm with your lender whether their prequalification process involves a credit pull — some lenders use the terms “preapproval” and “prequalification” interchangeably.
How having a mortgage affects your credit score
Once you close on your mortgage, you could see another drop in your credit score since you’ve officially taken on new, additional debt. However, your score will likely increase over time as you start making timely payments. Here’s why:
- Payment history – Your payment history is the most significant factor in your FICO score, and when you apply for new credit, lenders typically look at your last two years’ worth of payments. As you build positive payment history by making on-time monthly mortgage payments, your score could begin to climb — assuming you manage all your other debt payments responsibly. “In the long run, if you consistently make your monthly mortgage payments on time, this will be a serious boost to your credit score, as you’ve proven you can manage this large loan,” says Mazzara.
- Length of credit history – Most mortgages are longer-term loans, which can benefit your score in terms of length of credit history. This component accounts for 15 percent of your FICO.
- Credit mix – While less of a factor in your score, your credit mix will also improve with the new type of debt you’ve borrowed. Lenders and creditors like to see a combination of installment loans and revolving accounts such as credit cards. The more diversified your credit profile, the better likelihood of a bump to your score.
If you decide to refinance your mortgage at some point, your credit score could drop temporarily due to another hard inquiry on your report, similar to when you first applied for the loan. It could also get dinged because you’ll be paying off your existing mortgage with a new one, potentially shortening your length of credit history. However, your score should start to increase again once you begin making payments on the new loan.
When you pay it off
Paying your mortgage off is something to be celebrated, but it can have an impact on your credit since you’re no longer managing significant debt and your “mix” isn’t as varied.
“If you have a mortgage, credit cards and an auto loan, for example, and you’re managing them all, that’s a good credit mix,” says Mazzara. “Eliminating the mortgage will decrease the ‘variety pack’ the [credit] bureaus like to see, but the reduction [to your score] should be small — far smaller than the impact of being 30 days late, for example.”
How a mortgage can harm your credit
Life happens, sometimes along with financial hardship. Unfortunately, your credit score will take a significant hit if you miss a mortgage payment, and late payments will linger on your credit report for up to seven years, with the impact diminishing over time. This can make it much harder to obtain credit, including another mortgage, in the future.
“If you are more than 30 days late on a payment, that will dent your score considerably, and a foreclosure will really send it into a tailspin,” says Mazzara. “It’s a very serious matter for the credit bureaus, so avoid this like the plague.”
Be mindful that most mortgage lenders offer a 15-day grace period before assessing a late-payment fee. As soon as you sense trouble with making payments, contact your lender or servicer to discuss your options.
Credit score and mortgage FAQ
Your credit score shouldn’t take more than a year to recover after getting a mortgage, assuming you make all of your mortgage payments on time. Getting preapproved or applying for a mortgage usually only temporarily affects your score.
Ideally, you should refrain from borrowing more until your credit score rebounds so you’ll qualify for the best interest rates. The amount of time it’ll take depends on your current credit profile, but count on at least a year or so. This waiting period also gives existing credit inquiries enough time to drop off your report or otherwise cease impacting your score. It also gives lenders a chance to evaluate how you’re managing your new mortgage.
If you take out a second mortgage, your score could drop when you apply and close on the loan. However, it’ll start to climb again if you make timely payments.