As long as you make your payments on time, having a mortgage can build your credit score. You may see a slight negative impact to your credit when you first apply for a mortgage, since the lender will likely do a hard pull on your credit report. But after that, your mortgage will generally have a positive impact on your credit score, assuming you’re consistently making on-time payments.
Key Points
• Making on-time mortgage payments can contribute to a positive payment history and build credit scores.
• A mortgage can diversify credit mix and demonstrate responsible management of various credit types.
• The initial hard inquiry during a mortgage application may cause a temporary, minor drop in credit score.
• Maintaining and building credit after buying a house involves timely payments and limiting new credit inquiries.
• Regularly reviewing credit reports for inaccuracies and remedying any that are found can help maintain and build a credit score.
Does Having a Mortgage Build Your Credit Score?
One of the mortgage basics is that in exchange for an upfront payment (generally a down payment used to purchase a home), you’ll make regular monthly payments to your lender for a specified period of time (often 30 years). Having a mortgage on your credit report can help your credit score in two ways. First of all, making your mortgage payments on time each month helps show a positive payment history. Another way that having a mortgage can help your credit is by diversifying your credit mix, which is another factor that makes up your credit score.
How Mortgage Application Impacts Credit Score
The process of applying for a mortgage can impact your credit score in a variety of ways. Here’s a closer look.
Situations Where It May Hurt Your Credit
When you apply for a mortgage, your lender will usually do a hard pull on your credit report to assess your overall creditworthiness. This process can lower your score by up to several points for a few months. This might impact which credit range you are in.
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Situations Where It May Help Your Credit
It can be smart when applying for a mortgage to work with different lenders to find the right home loan for your situation. One piece of good news is that multiple mortgage-related inquiries in a short period of time usually will only count as one inquiry. So if you’re working on establishing credit, you won’t need to worry about multiple inquiries from different mortgage lenders having a significant negative impact, as long as they’re all within the same window of time.
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How a Mortgage Can Affect Your Credit
Beyond applying, there are a number of ways that having a mortgage can affect your credit. When you get a mortgage it can help your credit score, but it can also hurt it.
Hard Inquiry When You Apply
One of the factors that makes up your credit score is the number of recent hard inquiries you have. Any time a potential lender conducts a hard pull of your credit report, it can cause a temporary drop in your credit score by a few points. This drop usually goes away after a few months, but it’s something to be aware of.
Paying Your Mortgage On Time
One important factor that affects your credit score is your payment history. So if you have a mortgage and pay it on time each month, that can make a positive contribution to your credit score. This is one reason it’s important to make sure that you don’t take out a mortgage that you’ll have trouble paying each month.
Late Or Missed Mortgage Payments
Because your payment history is such a big part of what makes up your credit score, late or missed mortgage payments can have a large negative impact on your score. Potential lenders look at your credit report to get an idea of how likely you are to repay your debt obligations, so having late or missed payments can be a red flag to future lenders.
Improving Your Credit Mix
A lesser-known but still important part of what makes up for your credit score is your overall credit mix. Generally, it’s considered a positive sign if you have a variety of different types of credit on your credit report. This includes different types of credit cards, auto loans, mortgages, personal loans, etc. Adding a mortgage to a credit report that doesn’t have one helps diversify your credit mix.
Changing Your Average Age of Accounts
Another factor that contributes to your credit score is your overall average age of accounts. Potential lenders like to see a lengthy history of you responsibly using the credit that’s been issued to you. So while initially a new mortgage will lower your overall average age of accounts, over time it can work in your favor.
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Tips for Building Your Credit Score After Buying a House
After you’ve bought your house, here are a few tips to continue building your credit:
• Pay your mortgage in full and on time, each and every month.
• Continue to pay your other debts (like credit cards and student loans) on time each month as well.
• Keep an emergency fund to ensure you can still meet your debt obligations (including your mortgage) even when the unexpected happens.
• Make sure you save enough money to pay your home insurance and property taxes (if your mortgage isn’t escrowed).
• Regularly review your credit report for unexpected or inaccurate information. Report any issues as needed to help protect your credit.
• Decrease your credit utilization ratio by raising credit limits and limiting debt.
• Limit your new credit inquiries as much as possible.
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The Takeaway
Having a mortgage can affect your credit score in a variety of ways, but most of them are positive. While you will likely see a small temporary drop in your credit score due to the hard pull from your mortgage lender, that should go away after a few months. Then, as long as you pay your mortgage on time each month, you should see a positive impact on your credit score from having a mortgage. Another great way to build your credit can be by responsibly using a credit card.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
How long does it take for your credit score to go up after buying a house?
When you get a mortgage (or any type of loan), the potential lender will likely do a hard pull of your credit report. Because the number of recent inquiries you have is a factor that makes up your credit score, this hard pull may temporarily drop your credit score. The good news is that it usually only drops by a couple of points, and even that small effect usually goes away after a couple of months.
How long should I wait after closing to make another big purchase?
You want to be careful about making large purchases or applying for any other credit before you are approved for a loan. This is because your lender and underwriter will be digging into your credit report in detail to make sure your overall financial situation is sound, and they’ll want to know about anything out of the ordinary. After you close on your mortgage, you don’t need to be as careful about making another big purchase, as long as it fits into your overall financial picture.
What credit score is needed to get a mortgage?
Typically, you will need a credit score of at least 620 to get a conventional mortgage, and a score of over 700 for a jumbo loan. At the lower end of the range of credit scores needed for a mortgage, you might find some government-backed loans available with a credit score of 500 and above.
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