How will my new mortgage affect my credit score?
Everyone knows that your credit score has a huge impact on both your ability to secure a mortgage, and the rate you have to pay once you get it. What may be less obvious is the impact that new mortgage will have on your credit score. This confusion stems from the fact that taking on a mortgage has both positive and negative implications for your credit score.
- Credit checks. Any time you apply for a loan or a line of credit, the lending agency runs a credit check on your credit history. Each of these checks causes a small ding on your credit score. Since multiple credit inquiries could indicate a debt problem, too many credit checks can cause your score to take a nose dive. On the positive side, mortgage loans have a grace period, during which multiple checks count as one. The grace period varies between 14 and 30 days, so get all your loan shopping done in 7-10 days to be on the safe side.
- Less available credit. Since one of the primary purposes of a credit score is to determine your ability to pay off your debts, a new mortgage will cause your debt-to-income ratio to go up. Banks will perceive this change as you having less money to pay off other debts, such as student loans or credit cards. Hedge against this possibility by avoiding taking on any other debt during the time you’re buying a house, no matter how much you love that new living room set!
- Mortgage debt is “good debt.” Mortgage debt is tied to a physical asset. Because of this, it’s considered responsible debt, as opposed to something like credit card debt, which is unsecured. Since having a mortgage is considered responsible, as long as you make your payments on time, it is often looked on positively by lenders.
- Debt variety. Potential lenders want to see a variety of debt on your credit report. While having a credit history full of paid off credit cards is good, having student loans, auto loans and a mortgage on your history (again, as long as the payments are made on time) is even better. Having multiple kinds of debt shows that you’re able to handle different kinds of credit and makes you less of a risk.
- Use it or lose it. Occasionally some individuals, very proud of the fact that they never borrow anything from anyone, are shocked to discover that their credit score isn’t outstanding. Part of what lenders are looking for is a history of paying off debt. Taking out credit and repaying it helps build your payment history, and of all the debt you could take on, a mortgage is one of the most favorable.
What does all this mean?
Initially upon taking out a new mortgage, your credit score may take a slight dip, but regular on-time payments will leave your score better than it started. Over the next six months to a year, the combination of continued payments and a varied debt history will likely improve your overall credit history and credit score.
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Photo by CollegeDegrees360