How Mortgages Affect Credit Scores

Financial gurus are constantly warning consumers to keep their credit score in tip-top shape if they’re planning to purchase a home in the near future. The higher your credit score, the more likely you are to get the best mortgage rates.

Once you have the mortgage, however, how will it affect your credit score going forward?

Immediately following your new mortgage, expect your credit to suffer. Your credit score is a numerical representation of your ability to pay back a debt obligation. When you take on the largest loan that most consumers will ever have, your score goes down until you prove that you have the ability to pay back the loan – and that you will actually make the payments you promised.

Because of this temporary lowering of your score, you may find it difficult to get other loans or get a loan with the credit terms you would expect. Plan to wait at least six months before applying for any loan of significant size. 

How do you bring your score back up to its pre-mortgage level? By making on-time payments every time. Don’t sign up for those services that say they can raise your credit score fast. Simply make your mortgage payments – and all other payments, for that matter – on time. As you prove that you’re a responsible borrower, your score will naturally rise.

According to FICO, the company in charge of compiling your credit score, 35% of your score is payment history.

Pay your bills on time and in full. If your busy lifestyle sometimes forces bill paying lower on your priority list, set up an automatic payment through your bank so you never forget. See Best Ways To Repair Your Credit Score for more advice.

Know the fundamentals. Your credit report measures your ability to pay back debts. You only earn so much money so keeping your amount of debt in good proportion to your income is essential. This is called your debt-to-income ratio.

Keeping it no higher than 36% is considered optimum with no more than 28% going to your mortgage. If you know you will purchase a home in the near future, don’t take on other debt obligations. Keep your debt-to-income ratio low.

However, do continue to build your credit history. A little credit is better than no credit as far as your credit score is concerned. And of course, paying your mortgage on time is good for your credit history. 

The calculation of your credit score is a bit of a mystery. FICO publishes general guidelines to help consumers understand their score, but nobody knows the specifics of the calculation. However, the types of loans you have play a role in your score.

Think of a mortgage as the pinnacle of consumer credit. If you can qualify for a mortgage you’re considered a trustworthy borrower. If your credit report contains nothing but a bunch of credit card loans, your score won’t be as high. This mix of revolving debt to installment debt (your mortgage) accounts for about 10% of your score. 

But, as Spider-Man's uncle once told him, “With great power comes great responsibility.” If you pay a credit card a little late, the effect on your score won’t be massive. If you don’t pay your mortgage on time, expect your credit score to reflect that. If it happens, make the payment as quickly as possible. If it’s a little late, your mortgage company may not report it to the credit bureaus.

Here’s the good news: As long as you pay your mortgage on time every time, the debt you take on for a home is considered responsible debt. And try to avoid making any other major purchases within six months of taking on a mortgage, since your credit score will likely drop from the process of getting the loan. A history of responsibly paying your mortgage and other bills should soon bring your score back up. For more information, see Four Ways To Protect Your Credit Score.