What Does a Mortgage Do to Your Credit Score?

One of the best financial decisions you can make is to purchase a home. Although the recent housing bubble reveals that buying a home can be risky, there are still many benefits to owning your dwelling. Particularly if you plan to live in the same area for an extended period, buying a home can save you a significant amount of money.

When you decide to buy a home, will acquiring a mortgage hurt your credit score?

The Mortgage: A Necessary Evil

Of course, the less debt you have, the better. However, most of us would have to work for many years before we could save up the $150,000+ necessary to buy a home. Meanwhile, the entire time that you spend saving up, you are paying out $800+/month for rent. Thus, once you can afford the 20% down payment, purchasing a home is generally a wise financial decision.

The impact of a mortgage on your credit score varies based on your ability to pay off the debt consistently. Fortunately, for someone who affectively manages their finances, a mortgage is beneficial. Meanwhile, for someone who fails to pay their bills regularly, a mortgage can have a tremendously negative impact.

When a Mortgage Can Hurt Your Credit Score

After the Initial Inquiry: When you first apply for a mortgage, you should plan on your credit score dropping slightly. The number of banks that pull up your credit report makes no difference – provided all of the inquiries occur within a 30 day period. Although an initial drop may happen, you can anticipate your score fully recovering, or even going higher, within 6 months to a year.

When You Miss Payments: A missed mortgage payment, or worse, a foreclosure, will remain on your record for seven years – making it incredibly difficult to find future lenders. Missing any payment lowers your credit score, but mortgage payments can have an even more significant impact due to their size and importance.

When You Open Additional Credit: Avoid signing up for new credit cards or borrowing for a vehicle within a year of getting a new mortgage. Lenders recognize a mortgage as an expensive commitment that greatly limits your finances. Therefore, opening up additional lines of credit can make banks nervous that you will not be able to manage all of your accounts.

How a Mortgage Can Benefit Your Credit Score

In short, a mortgage benefits your credit score when you pay your bills on time and in full. As time goes on, a mortgage payment reveals that you are capable of handling debt – which will increase your credit score. Additionally, as 10% of your credit score is based on having a variety of debts, having a mortgage, in addition to a credit card, can slightly bump up your credit score even further.

Never take out a mortgage purely for the sake of improving your credit score. If you don’t need a mortgage to buy your home, then you are in an enviable financial position. However, if you are debating between taking out a mortgage or saving up until you have the full value of your home, you should not feel uncomfortable borrowing to purchasing your home.