A mortgage is considered the pinnacle of consumer credit. Qualifying for one ranks you as a trustworthy borrower. But how does obtaining a mortgage affect your credit score now and in the future?
Learn how getting a mortgage in the U.S. can affect your credit score and how to keep your score in good standing after obtaining a home loan.
When you apply for a loan, lenders make hard inquiries into your credit file to learn if you are a good credit risk. A hard inquiry affects your credit score because it looks at how recently and how often you apply for credit, according to the Consumer Financial Protection Bureau. However, your credit is not affected by the outcome of hard inquiries, CFPB reports.
Lenders often make multiple inquiries into your credit file when shopping for the best loan rates and terms for your situation. A hard inquiry into your credit can reduce your credit score by up to five points, less if you have a strong credit history, according to Experian, a major consumer credit reporting agency.
You won’t rack up points on your credit score for each one, that is, if all of the inquiries are made within the same time period, usually 14 to 30 days. Instead, it counts as a single credit inquiry, Experian reports.
Your credit score may initially dip after adding a home loan to your debt load. You still have to prove that you can responsibly pay it back. Make your payments in full and on time.
If you don’t pay your mortgage on time, it can reflect negatively on your credit score. Contact your mortgage lender right away and explain your situation if you ever find yourself unable to pay your mortgage or other debt, says the Federal Deposit Insurance Corporation. Reputable credit counseling organizations can help you create a plan to help lessen some of the potential negative effects on your credit score.
A mortgage affects your credit score as long as it appears on your credit report. Managing this large, single debt well over the loan period can help improve your credit score.
Having a good mix of credit types demonstrates that you can handle different types of debt and can improve your score. A good credit mix might include a mortgage, a few credit cards, and a car loan. Too many credit cards can hurt your credit score, warns the Federal Trade Commission.
While it’s highly unlikely you'll pay off your mortgage in a month, paying off credit cards in full every month can have big benefits for your credit score. In fact, that’s one of the best ways to improve or maintain it, says the CFPB.
Making your monthly payments on time no matter what the credit type can help increase your score. Consider making an automatic monthly mortgage payment (and other payments), so you never have to worry about remembering to make a payment on time.
Additionally, your credit utilization rate is an important factor. If you use more than 30% of your available credit, your score could go down, warns the FDIC. You could cut back on your spending and ask your lenders to increase your available credit to decrease your credit utilization ratio.
The longer your credit history is, the better. It’s a good idea to keep credit cards open even if you don’t use them anymore, which demonstrates unused available credit. If you’re paying high annual fees, you can ask your credit card providers to consider upgrading you to a no-annual-fee card.
With your solid credit score and home loan approval, you can confidently shop for a home with Brookfield Residential. We offer a variety of homes, including single-family houses, condos, and duplexes.