Financial experts constantly warn consumers to keep their credit scores in tip-top shape if they’re planning to purchase a home in the near future. But even after you have a mortgage, your credit score is affected going forward.
The higher your credit score, the more likely you are to get the best mortgage rates. A mortgage calculator can show you the impact that different rates can have on your monthly payment.
Key Takeaways
- Taking out a mortgage will temporarily hurt your credit score until you can prove your ability to pay back the loan.
- Improving your score after taking on a mortgage involves consistently making your payments on time and keeping your debt-to-income ratio at a reasonable level.
- Mortgages help your credit score by improving your mix of revolving debt and installment debt. This mix accounts for roughly 10% of your score.
The Initial Credit Score Hit
Your credit score is a numerical representation of your ability to pay back a debt obligation that you've taken on, so you can expect your credit to suffer immediately after you get a new mortgage. Your score will go down until you prove that you have the ability to pay back the loan. You've taken on the largest loan obligation that most consumers will ever have, and you must actually make the payments as promised.
This temporary lowering of your score may make it difficult for you to get other loans or at least to get a loan with ideal credit terms. Plan to wait at least six months before applying for any loan of significant size.
A mortgage is the pinnacle of consumer credit, You’re considered a trustworthy borrower if you can qualify for a mortgage.
Making Payments on Time
Making on-time payments every month can bring your score back up to its pre-mortgage level. Don’t sign up for those services that say they can raise your credit score fast. Simply make your mortgage payments and all other payments on time. Your score will naturally rise over time as you prove that you’re a responsible borrower.
Pay your bills on time and in full. Set up automatic payments through your bank or with your creditors so you never forget if your busy lifestyle sometimes forces paying bills lower on your priority list.
35%
The percentage of your score that represents your payment history, according to FICO
Impact When Building Your CreditHistory
Your credit report measures your ability to pay back debts. You only earn so much money, so keeping your amount of debt in good proportion to your income is essential. This is called your debt-to-income ratio.
Keeping your ratio no higher than 36%, with no more than 28% going to your mortgage, is considered ideal. Don’t take on other debt obligations if you know you'll purchase a home in the near future so you can keep your debt-to-income ratio reasonably low.
But you do want to continue building your credit history. A little credit is better than no credit and, of course, paying your mortgage on time is good for your credit history.
Missing Payments on Your Mortgage
The exact calculation of your credit score is a bit of a mystery. FICO publishes general guidelines to help consumers understand their scores, but nobody knows the specifics of the calculation. The types of loans you have do play a role in your score, however.
Your score won't be as high if your credit report contains nothing but a bunch of credit card loans. A mix of revolving debt and installment debt, such as your mortgage, accounts for about 10% of your score.
The effect on your score won't be massive if you pay a credit card a little late, but expect your credit score to reflect the misstep if you don’t make your mortgage payment on time. Make the payment as soon and as quickly as possible if you do miss one. Your mortgage company may not report it to the credit bureaus if your payment is just a little late.
What Can I Do to Prevent My Credit Score From Dropping?
Of course, you'll want to continue to pay all your credit obligations on time. And it's generally not a good idea to take on other, additional debt if you plan to apply for a mortgage in the near future. But you'll also want to avoid even applying for other debt, particularly in a short period of time, because this can affect your credit score as well.
How Can I Find Out What My Credit Score Is?
You can simply ask your potential lender what it is if you've already applied for a mortgage. Or you can reach out to FICO for a copy of your credit report, your credit score, and score monitoring if you want to know what it is in advance of applying for a mortgage. It will cost you from $19.95 to $39.95 a month, as of July 2023, but this generally includes updates every month so you can keep track of how things are going.
What Is a Poor Credit Score?
The exact number depends on which agency is reporting your score: FICO or VantageScore. In both cases, a "very poor" score falls into a range. Both agencies begin with a low of 300. VantageScore says your score is very poor if it is from 300 to 499. FICO's "very poor" range is 300 to 529. A "poor" score is generally considered to be anything under 600.
The Bottom Line
Debt that you take on for a home is considered responsible debt as long as you pay your mortgage on time every month. Try to avoid making any other major purchases within six months of taking on a mortgage, because your credit score will likely drop from the process of getting the mortgage loan.
A history of responsibly paying your mortgage and other bills should bring your score back up. But credit repair companies may be able to undo some of the damage should unavoidable circ*mstances lead to multiple late payments, further damaging your score.
