Your Credit Score Could Take a Hit After Getting a Mortgage, But Don’t Worry

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Yes, your credit score will likely drop when you take out a mortgage, but you’ll likely be better off in the long run. (iStock)

After buying a home, you might be surprised to find that your credit score goes down. For a new homeowner who’s probably spent months making sure their credit rating was only going up, this might seem like a concern. Fortunately, it’s not uncommon for your credit score to drop after a large purchase on credit. Plus, the ding to your credit score will be temporary as long as you make your payments on time each month.

If you’re appalled at your lower credit score, it might help to understand a little about the credit score model and why your number dropped.

Why did my credit rating drop after applying for a mortgage?

Your credit score has dropped for several reasons. First, when you apply for a mortgage, lenders will do what is called a “thorough investigation”. A serious investigation means that the lender collects your entire report and scores your credit. This type of request appears on your credit file and can affect your credit score. If you have too many difficult requests in a short time, some lenders may be reluctant to extend credit.

Second, when you took out your mortgage, your total debt increased and affected your debt-to-equity ratio and your use of credit.

You can help ensure you aren’t denied credit by improving your score and paying your bills on time, keeping bills out of collection accounts, or even signing up for credit monitoring or credit alerts. fraud to make sure there is no fraud or errors on your credit.

You can help by taking preventative measures when looking for a lender. Visit an online mortgage broker like Credible to get personalized rates in minutes without affecting your credit score.

BUYING A HOUSE IN THE MIDDLE OF THE PANDEMIC? HERE’S THE CREDIT SCORE YOU NEED

What factors affect your credit rating?

Several factors make up your credit score. Credit reporting companies review:

  • Payment history
  • Use of credit
  • Age and composition of credit
  • Difficult requests

Payment history: Your payment history is the most important part of your credit score. It represents about 35% of your total credit score. If you need to improve your credit, making your payments on time each month is the fastest way to get a raise.

Total of : How much debt do you have compared to your income? Also, how much of the total debt you have are you using? Ideally, you should aim to keep your credit card balance below 50% of the available limit to avoid a bad credit score. Your debt represents 30% of your total credit score.

Age and composition of credit: Having older credit accounts with a history of one-time benefits can significantly improve your credit score. So if you have older credit cards that you don’t use, consider leaving them open on your credit report to keep your average credit age higher.

What type of debt do you have? Too many credit cards versus student loans, mortgages, or personal loans could affect your credit score. Your credit age and credit mix make up 25% of your credit score.

5 BENEFITS OF HAVING A GOOD CREDIT SCORE

Serious demands/new debt: New debts and inquiries make up about 10% of your credit score. You can keep your score from dropping and giving yourself bad credit if you don’t open too many new accounts at once. Difficult requests also affect your credit score. When applying for a mortgage, consider shopping around with multiple lenders within a few weeks to limit the effect on your credit score.

You can explore your mortgage options by visiting Credible to compare rates and lenders.

How will my credit score increase over time?

Credit scores take time. Most lenders report payments and other information to credit reporting companies once a month. It may take several months of good behavior for the credit bureaus to report positive effects on your credit score.

Your credit score will increase over time as you continue to make on-time payments on all lines of credit, including personal loans, student loans, credit cards, and mortgages. You should focus on reducing these balances and allowing your credit to age.

Negative marks on your credit, such as too many difficult requests, late payments, foreclosures, or lawsuits, affect your credit score less and less over time. Eventually they will fall off your credit report. If you notice your credit score going up a few points in a month, that could be the reason.

Once you’re ready to apply for a mortgage, use an online mortgage calculator to determine your potential monthly payments.

HOW OFTEN DOES YOUR CREDIT SCORE CHANGE?

Your credit will likely be better in the long run

Even though your credit score will be slightly affected at first, your credit score will probably be better in the long run. Since a mortgage typically takes 15 to 30 years to pay off, your credit age will increase each year. A mortgage allows you to diversify the type of debt you have. One-time payments over several years will give your credit score a significant boost.

When you’re ready to research mortgage lenders, head over to Credible. Credible can help you compare multiple mortgage lenders at once in just minutes. Use Credible’s online tools and get prequalified today.

Do you have a financial question, but you don’t know who to contact? Email the Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.

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