What Happens To Your Credit After Taking Out A Mortgage?

If you’ve started the home buying process, you likely know how important a solid credit report is to securing financing from a lender. But, what happens to your credit after you buy a home?

Does buying a house help your credit or hurt it? Let’s find out how your credit score is affected.

Does Buying A House Help Your Credit?

For most homeowners, taking out a mortgage means signing up for the largest sum of debt in their lives. Credit reporting agencies will penalize this new mortgage debt with a short-term ding in your credit score, followed by a significant boost after several months of regular, on-time payments.

In other words, taking on a mortgage loan can temporarily lower your credit score until you prove to your lender that you’re capable of paying it back. This involves making consistent, timely mortgage payments and not taking on too much additional debt in the meantime.

Understanding Types Of Credit And Debt

In general, there are two types of debt: installment loan debt, or installment credit debt, and revolving credit debt. Let’s take a look at the differences.

In Brief: Installment Credit

Installment credit is fixed, which means you’ve borrowed a finite amount and are making monthly payments toward that loan in order to pay it off. Types of installment credit include student loans, personal loans and your home loan.

With a mortgage loan, you have a set payment plan that will eventually result in the debt being paid in full. This kind of “good debt,” when paid on time, can improve your creditworthiness.

In Brief: Revolving Credit

Revolving credit is different from an installment loan because it’s a line of credit that’s open for you to use. An example of revolving credit is a credit card, where you’re making payments that tend to fluctuate each month.

In that way, revolving credit doesn’t require a plan to pay it off. You might be making payments, but you also can be adding new charges.

On-Time Mortgage Payments Equal Higher Credit Scores

A home loan will eventually help your credit history because making payments consistently will whittle down the loan balance. Your credit card debt, on the other hand, can continue to climb, which is why it’s more apt to negatively impact your credit score.

How Having A Mortgage Affects Your Credit Score

Here’s a closer look at how applying for a home loan affects credit, and how to get approved and then make reliable payments toward the balance.

How Much Your Credit Score Dips When You Take Out A Home Loan

According to FICO^®, your credit score can slide by five points when your lender pulls your credit. That’s because a credit check from an application is a hard inquiry. A soft credit inquiry is when you check your own credit or a lender with whom you already have a loan just takes a look to make sure you’re on target.

Once you actually take out the home loan, your credit score can potentially dip 15 – 40 points, depending on your current credit. This decrease probably won’t show up immediately. You’ll likely see it within 1 or 2 months of your closing, when your lender reports your first payment.

On average, it takes about 5 months for your score to climb to its previous level as you make on-time payments, assuming the rest of your credit habits stay strong.

The Effect On Other Lines Of Credit

As your credit score takes the aforementioned short-lived dip, it may affect interest rates on other types of loans you might need, such as an auto loan. That’s because – even though reliably paying off your mortgage month after month proves you’re a responsible borrower – that positive activity won’t show up and be factored into any money moves you make for now.

That means you might want to wait until your credit score has recovered before seeking another new loan. And, by then, your reliable, on-time payments might open the door to an even better interest rate than you might’ve qualified for before.

Good Credit Vs. Bad Credit – Does It Matter?

While there’s no hard and fast number at which you won’t qualify for a mortgage, most lenders – including our friends at Rocket Mortgage^® – look for a credit score of at least 620 for a conventional loan. If your score is lower, you might need to pay a higher mortgage rate or explore other types of loans for which you might qualify. So yes, your credit score is highly impactful when you’re trying to get a mortgage.

Credit industry leaders such as FICO^®, and VantageScore^®, and bureaus Equifax^® TransUnion^® and Experian^™ use slightly different scoring models. Below is a general guide to credit score rankings, according to FICO^®.

• Exceptional: 800+
• Very good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Poor: 579 and below

FAQs About How A Mortgage Affects Your Credit Score

Here are a few common questions about how a mortgage can affect your credit score.

How long does it take for credit scores to go up after buying a house?

On average, it takes about 5 months for your credit score to recover as your payments get reported to the major credit bureaus, although it could take longer. Fortunately, your credit score may make incremental jumps during that time.

How long should I wait after closing to make another big purchase?

It can be smart to wait up to 5 months after closing to make major purchases or apply for new loans. You’ll want cash on hand for any unexpected expenses and fees that might arise. Plus, waiting for your credit score to jump should help you get a better interest rate.  

How can I improve my credit score?

Qualifying for a home loan is the first sign you’re on the right path. But as you strive to build your credit score, you might be wondering what factors impact it the most. Here’s a breakdown that FICO^® shares of the model it uses to determine your credit score:

• Payment history (35%)
• Credit utilization (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

Will buying a house hurt my credit?

Typically, the hard credit pull required to get a mortgage loan will decrease your credit score by about 5 points. Once you actually get the loan, you might have a short-term dip of 15 – 40 points. If you consistently make monthly payments on time, though, you’ll likely see your credit score recover and even improve.

How many points could a mortgage raise my credit score?

It’s hard to say exactly how much paying your mortgage every month will improve your credit score. The amount of time you’ve had the mortgage and your current balance affect how much your score might improve.

The Bottom Line: A New Mortgage Drops Your Credit Score, But On-Time Payments Lift It

Getting a mortgage will affect your credit score. While it might dip slightly at first, your credit score will improve if you make consistent, timely mortgage payments every month and don’t take any financial actions that will damage your score.

Once your credit score is on the rise, you’ll likely see better terms and interest rates for future loans you take on.

If you just bought a house and want to check your credit score for signs of recovery, download the Rocket Money℠ app today.