Are you a homeowner and wondering how a mortgage affects your credit score? Here, we’ll talk about both, the positive and negative impacts on your credit score.
Becoming a homeowner is a dream come true moment for us. All those efforts you’ve made to save money and avoid expenses have finally paid off. Now you can enjoy a wonderful in your luxurious home by repaying your mortgage loan.
Yes, timely payment of your mortgage is important to retain your luxury lifestyle and avoid defaulting on your loan.
At this point, your question might be, “What’s the importance of this?” Let’s first talk about the potential reason why you had your mortgage loan approved. It was probably because you had a good credit score.
A credit score is numeric data, calculated on the repayment of your debt. Higher debt means your credit score is decreased. At the same, paying your loans on time also keeps your credit score strong.
Your credit score is a major indicator for the lender to approve your loan. Having a high credit score for a mortgage makes it easier to get loan approval.
Yes, we know what you must be thinking right now, “When I buy a home on a mortgage, won’t I have a considerable debt to repay?” You’re absolutely right.
Let’s understand how a mortgage affects your credit score. We’ll about the positive and negative impacts on a credit score. In addition, we’ll also suggest ways you can start rebuilding your credit score to make your credit score as healthy as it was at the time of buying the house.
Let’s talk about it.
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When you buy a home on a mortgage, you’re technically risking the health of your credit score. As soon as you close the deal and move into your new home, you can expect your credit score significantly drop.
When your mortgage affects your credit score negatively, it can be hard for you to get other loans or favorable repayment terms from the lender. With such a significant mortgage loan, you may have to wait for 6 months and apply for such a big loan again.
After your credit score has reached its former glory, you can be more hopeful of having your loan applications approved.
We’ve said, “Wait for the credit score to improve.” But that’s not a certainty. You need to make sure you make regular payments to the lenders, as per the terms you’ve agreed.
If you keep on missing your loan repayment, you’ll not be doing any favors to your credit score. As per Fair Isaac Corporation (FICO), your payment history contributes 35% to increase or decrease your credit score.
So, if you want a high credit score for mortgages and other loans, regular repayment of your debt is your best option to do so. Or along with a negative credit score, you can face property foreclosure as well.
Fair Isaac Corporation is a renowned data analytics company for developing a model to calculate the credit score for mortgages and other loans.
If you think only a mortgage affects your credit score, that’s not entirely accurate. The number of credit accounts you have is also a major factor to dictate whether your credit score increases or decreases.
The credit accounts can be your credit cards, auto loans, and of course, your mortgage loan. This is also called a credit mix, which (as per FICO) accounts for 10% of your credit score.
One of the ways to grow your credit score is by diversifying the credit mix. Having unique credit accounts can help you increase your credit score faster. Yes, that would mean your loan repayment has also increased. Are you ready to pay more and see your credit score rise? That’s your decision.
Credit scores and their calculation can often be as complicated and mysterious as the Bermuda Triangle. Sometimes, even financial experts and gurus can’t seem to predict what will happen. To be more certain about where your credit score is headed, you can use the debt-to-income ratio.
The debt-to-income ratio tells you where the difference between your monthly income and the monthly debt. Having a mortgage affects your credit score negatively if your income is not enough to repay that debt.
So, a decreasing debt-to-income ratio is a sign that you’re on the right track to increase your credit score for mortgage and other loans.
Do you know when you have sufficient home equity, you’re eligible for a home equity loan? You can also avail this loan if your property value has increased compared to what it was at the time you purchased it.
“But what does the home equity loan have to do with your credit score for a mortgage?” you might be wondering. The thing is, anytime you pay back any loan before it is due, your credit score increases, and it’s the same with a home equity loan.
Want to know why a home equity loan can be easier to pay back, compared to all the others? One major reason is that there’s a fixed interest rate for the home equity loan. Secondly, you may have a longer repayment period for the home equity loan.
These were just two of the many reasons why your credit score for mortgages and other loans can rise.
Let’s fall back and see what the FICO model has to say about utilization. Using your credit has an impact of 30% on your credit score. This gives you the opportunity to show your responsibility towards efficiently managing your credit which is available.
You might ask the question, “What’s the ideal utilization rate for improving my credit score?” Well, there’s no specified rule for it. As per financial experts around the world, a utilization rate of below 30% can do wonders for your credit score.
For example, if your credit limit is $100,000, and you spend $20,000, your utilization rate is 20%, which is not bad. If you want to further optimize your utilization rate and show you are financially responsible, keep the utilization less than 10%.
How old is your credit account? That’s a vital factor to determine the impact on your credit score for mortgage and other loans. Why? Because according to FICO, credit length accounts for 15% of your credit score.
That means, instead of cutting off or throwing your old credit cards thinking you’ve paid for them and that’s it, keep them with you. Despite not using them, it’s advisable to keep your credit accounts open.
Having an old credit account can showcase your positive financial habits to grow your credit score. As opposed to a new credit account, where the sample size would be insignificant to assess your financial activities.
Another reason for long credit history is that occasional high credit utilization or missed payment may have a smaller impact on your credit score. When the credit history is fresh, each event is highlighted and can affect your credit score.
So far, we’ve mentioned various loans and credits you can apply for. But the thing is, applying for too many loans within a short period might not be a good idea.
Reason? Because it can increase the number of inquiries on your credit report. Wondering what’s a credit report? It records your credit history and financial behaviors, along with your debt repayment activities. These reports are generally managed by the credit bureaus.
You have 2 types of inquiries, hard and soft.
A hard inquiry is where you apply for another mortgage or some other loan. Multiple hard inquiries in a short period are not what you’d want. It can negatively impact your credit report. On the other hand, you have soft inquiry is when your credit report is viewed for non-lending purposes. They don’t affect your credit score.
The joy of becoming a homeowner may come in decreased credit scores for mortgages and other loans, but it doesn’t have to be long-term. With these activities, we’ve mentioned that timely repayment of mortgage affects your credit score positively.
Now that you know how you can improve your credit score after buying a home, the next step is to start looking for properties. HAR can be your partner to help you in this journey. We have qualified real estate agents who can help you strike the perfect deal and buy your desired home.
Having a mortgage can affect your credit score both positively and negatively. Initially, it may cause a temporary drop in your credit score due to the new credit inquiry. However, making regular and timely payments on your mortgage can boost your creditworthiness over time.
To prevent a decrease in your credit score after buying a home, ensure you make regular, on-time payments on your mortgage. Maintain a low debt-to-income ratio, diversify your credit mix, and avoid excessive credit inquiries. These practices can help protect and potentially improve your credit score.
Closing old credit accounts can have a negative impact on your credit score because it may reduce the length of your credit history. A longer credit history is generally viewed more positively by credit scoring models. It's often advisable to keep old credit accounts open even if they are not actively used.
A utilization rate is the percentage of your available credit that you are currently using. A lower utilization rate, ideally below 30%, can positively impact your credit score. It demonstrates responsible credit management. Keeping your utilization rate low can help improve your creditworthiness.
A hard inquiry occurs when you apply for a new mortgage or another type of loan. Multiple hard inquiries within a short period can negatively impact your credit report and potentially lower your credit score. On the other hand, soft inquiries, which are for non-lending purposes, do not affect your credit score.
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