How your mortgage affects your credit score

FG Trade/GettyImages; Illustration by Hunter Newton/Bankrate

Does buying a house hurt your credit? It all depends on the timing.

When you get a mortgage to buy a home — and as you pay it down over time — there will be some negative impact on your credit score: You’ve just assumed a huge debt, after all.

However, your credit score can always change, increasing or decreasing depending on the time frame, your other debt and how you manage your mortgage and other debt payments.

Let’s look at home loans’ impact on credit scores from beginning to end: how applying for a mortgage, how having a mortgage, and how paying off your mortgage affects your credit score.

How applying for a mortgage affects your credit score

When you apply to get preapproved for a mortgage, the lender typically pulls your credit report. This action registers as a hard inquiry, which slightly lowers your credit score for a brief period.

Not to worry, however, if you’re applying for preapprovals from several different lenders. The credit bureaus assume you’re shopping around for the best mortgage — as you should — and that you’re only going to go with one lender. So, all mortgage-related inquiries made within a certain window get grouped into a single inquiry, minimizing their impact.

Different lenders use different scoring models, which can affect the length of this window. For FICO scores, the most prevalent model, this window is 45 days. VantageScore, an alternative scoring model preferred by some lenders, such as SoFi, uses a rolling two-week window. This means multiple applications will count as a single inquiry as long as there are no more than two weeks between each application.

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. It can help determine your approval odds, how much house you can afford and the rates you might qualify for. But do confirm with your lender whether its prequalification process involves a hard pull — some lenders use the terms “preapproval” and “prequalification” interchangeably.

How having a mortgage affects your credit score

Your score will likely increase over time as you start timely mortgage payments. Here’s why:

• Payment history: Your payment history is the most significant factor in your FICO score. When you apply for new credit, lenders typically look at your last two years’ worth of payments. “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 your credit history length.
• 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 the likelihood of a bump to your score.“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.

If you decide to refinance your mortgage, your credit score could drop temporarily due to another hard inquiry on your report — just as it did with the original mortgage application. It could also dip because you’ll be paying off your existing mortgage with a new one, potentially shortening the average age of your credit accounts. However, your score should start to increase again once you begin making payments on the new loan.

How paying off your mortgage affects your credit score

Paying off your mortgage is something to celebrate. But it can impact your credit since you’re no longer managing significant debt and your “mix” isn’t as varied.

“Eliminating the mortgage will decrease the ‘variety pack’ the [credit] bureaus like to see,” Mazzara says. “But the reduction [in 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, and so can financial hardship. Unfortunately, if you miss a mortgage payment, our credit score can take a significant hit. 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.

How to optimize your credit for a mortgage

Want to improve your credit score and your odds of getting approved for a mortgage — and a better interest rate on the loan? Follow these best practices:

1. Pay all bills promptly. Keeping all accounts in good standing is essential, as a missed or insufficient payment can harm your credit score, with delinquencies lingering on your credit report for up to seven years. If you’re late but still within the grace period, reach out to the creditor immediately to discuss resolving the issue and possibly waiving the late fee. Strive to consistently meet payment deadlines going forward if you have any existing late payments.
2. Reduce your credit card balances. Your credit utilization ratio, which compares the amount you owe to your total available credit, carries significant weight, comprising around one-third of your score. Lowering this ratio is beneficial, so concentrate on paying down balances to dip and stay below 30 percent.
3. Avoid additional debts. Whenever possible, refrain from opening new credit card accounts or taking out additional loans right before applying for a mortgage and throughout the application and underwriting phases. Similarly, avoid closing old accounts, as doing so may increase your utilization ratio, negatively affecting your score.
4. Acquire copies of your credit reports from major bureaus like Equifax, Experian, and TransUnion, accessible through AnnualCreditReport.com. Go beyond simply checking your scores; meticulously examine for any inaccuracies, especially regarding late payments or closed accounts. If you spot an error, promptly inform the bureau to initiate a dispute.
5. Seek guidance from a responsible credit user, especially if you’re a younger, first-time buyer with limited credit history. One tactic to enhance your credit profile for home purchasing involves becoming an authorized user on a credit card held by a parent or relative. While the primary cardholder handles payments, you can benefit from their positive payment history.

FAQ about mortgages and credit scores

• Does buying a house hurt your credit?

  Getting a mortgage for a house can cause your credit score to decline in the short term. But as you pay your mortgage on time, your credit score will bounce back.

• Does a mortgage help your credit score?

  A mortgage can increase your credit score in the long term if you consistently make on-time, full payments. Doing so demonstrates that you can responsibly manage your obligations, building up a solid record and credit history.

• How long after buying a house does your credit score go up?

  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.

• How long after closing should I wait before borrowing more?

  Ideally, you should refrain from borrowing more until your credit score rebounds so you’ll qualify for the best interest rates. The time it’ll take depends on your current credit profile, but count on at least a year or so, especially if you’re considering a refinance. This waiting period 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.

• How far back do mortgage lenders look at credit history?

  Typically, mortgage lenders look at the last six years of your credit history before making a decision on whether you give you a loan. That means anything that happened before then will not be assessed in their decision, including bankruptcy.