At first glance, it may seem as if your mortgage and credit score aren’t connected in any way.
But there are. While a mortgage is a home loan, your credit score indicates your credit worthiness – which is how likely you are to repay a loan at the right time.
So if you’re looking to buy a home any time soon or in the future with a mortgage, bear in mind that your credit score will determine the type of mortgage rates you’ll end up with.
The rule of thumb is straight forward: the higher your credit score, the better your chances of getting the best mortgage rates.
But it doesn’t end there!
The question is, as soon as you get the mortgage, will it have any negative impact on your credit score? Yes, it will.
Learn about how to repair your credit for free and enhance your score here.
Mortgages Lower Credit Score
Once you get your new mortgage, it will have a direct impact on your credit score – this means your credit score will take a direct hit.
Your credit score is a figure that indicates your credit worthiness. So when you get a mortgage, which is the biggest loan many people borrowers will ever take, your score will drop until you’re able to prove that you can repay the mortgage. You’re also required to repay the loan as agreed.
As a result of your temporary low credit score, it could be hard for you to obtain other types of loans or obtain a loan on the credit terms you anticipated.
So it is strongly recommended that you wait for a period of six months before you apply for any other type of large loan.
Avoid Late Payments
As soon as you’ve discovered that your score has taken a hit because of your mortgage, the next thing on your mind should be how to boost your credit score back to its pre-mortgage level.
The rule for that is simple – yet very difficult for many borrowers. You’ll have to make payments at the right time always. You may as well avoid services that claim they can repair your credit very fast.
All you have to do is pay your mortgage on time and do the same for all other payments too. Once you start proving that you’re a worthy borrower, your credit score will begin to rise gradually.
FICO has made it known that your payment history is responsible for up to 35% of your credit score. This means you should pay your bills at the right time and always make a complete payment.
If your schedule makes bill payment a less priority compared to other things you have to take care of, you should request an automatic payment via your bank to avoid late payments and missing payments.
You can learn about how to repair your credit score all by yourself for free here and what a credit repair company can actually do for you here.
Why Mortgages Lower Your Credit Score
It’s easy to wonder why obtaining a mortgage with a good credit score means your credit score will take a hit and falls lower.
The reason is simple – you just obtained more debt. First, you have to understand the basics.
Your credit report indicates your possibility to repay a debt. Since you only earn so much, do all you can to keep your amount of debt in good ratio to your income – this is important. This is known as your debt-to-income ratio.
When you maintain a debt to income ratio that isn’t higher than 36% it is viewed as ideal and not more than 28% ends up in your mortgage.
If you’re planning to buy a home in the near future, avoid obtaining other types of debt. Do all you can to keep your debt-to-income ratio as low as you can.
Despite that, you should never stop building your credit history. In terms of credit score, a little credit is better than none at all. So paying your mortgage at the right time is healthy for your credit history.
Getting A Mortgage Can Enhance Your Credit Mix
How your credit score is calculated may seem like a maze. This is one of the key reasons why FICO publishes some guidelines to help man people understand how the credit score process plays out.
While it may seem tricky to understand the specifics of calculating your credit score, you should learn more by reading about the five key things that affect your credit score here.
That said, the type of loan you have will also have an impact on your credit score.
Consider a mortgage as the highpoint of consumer credit. If you’re eligible for a mortgage, you’re rated a creditworthy borrower.
But if your credit report is filled with several different credit card loans, it will have a negative impact on your score. Up to 10% of your credit score is responsible for the mix of revolving debt to installment debt (that’s your mortgage).
But expectedly, the higher the stake the severe the impact. For instance, if you make a credit card payment a little late, it won’t have a severe impact on your credit score.
But if you fail to pay your mortgage at the right time, expect your credit score to take a hit.
So if you ever fall behind on your mortgage payment, make the payment as soon as you can. If it’s not too late, your lender may not report the situation to the credit bureaus.
Your mortgage is considered a responsible debt as far as you make your payment at the right time always.
You should also avoid obtaining any other major loan within six months after getting your mortgage. This is because your mortgage will lower your score and any other major loan will make the score fall even lower.
Keep a consistent history of paying your mortgage at the right time and watch your credit score rise gradually. Learn more about why credit score crashes and what you can do to improve it here.