If you’re looking to buy a home, chances are you’re going to need to take out a mortgage to finance it. Having a great credit score will provide you with better mortgage options, but what happens after you acquire a mortgage? Like any other finance option, a mortgage will have an effect on your credit score. For most borrowers, this is a great opportunity to improve your credit score.
Your payment history is probably the most important factor in determining your credit score. Most mortgages have a duration of 15 to 30 years, providing you with ample time to build your score, as long as you are making your payments on time. If you begin to default on your mortgage, however, you’ll see your credit score take a turn for the worse.
Although less important than making timely payments, having a variety of different types of credit will have an effect on your overall score. Having a mortgage on your credit report will carry a lot more weight than a few credit card payments. So simply having a mortgage on your credit history can be beneficial, provided that you’re staying current on your payments.
Although having a mortgage can help better your credit score, there are some downsides. During your initial mortgage application, your credit will need to be checked. This will cause a hard credit pull, which may result in your score dropping by a few points.
When “shopping around” many credit bureaus like FICO will count multiple mortgage inquires, in a short span of time, as a single inquiry so as not to hinder your score too much. However, inquiring for multiple types of credit will almost certainly have a noticeable negative effect on your credit score. Always secure your mortgage before opening new lines of credit.
Buy or Rent
Consider your credit score when determining if you should buy or rent a home. Making monthly rent payments typically does not boost your credit score the way monthly mortgage payments do. If you want your rent payments considered in your credit score, you’ll need to consult a rent reporting service to aid you in providing credit bureaus with those payments. Mortgage payments do not require this sort of additional effort to be factored into your credit score.
Initially, obtaining a mortgage will probably cause you score to drop a tad. But this is expected, and most likely temporary. As long as you continue to make your payments on time, you should see your score return to normal after a few months. If you’re struggling o remember to make your payments, try setting up automatic payments to ensure that you’re staying current on your loan. If all goes well, you score should rise above what it was when you first applied for a mortgage.