Your credit score could take a hit after getting a mortgage, but you shouldn’t worry

After buying a home, you might be surprised to discover that your credit score goes down. For a new homeowner who likely spent months ensuring your credit score only went up, this might feel concerning. Fortunately, it’s not uncommon for your credit score to dip after a major credit purchase. Additionally, the ding to your credit score will be temporary so long as you make your payments on time every month.

If you’re staring at your lower credit score in dismay, understanding a bit about the credit scoring model and why your number dropped might be helpful.

Why did my credit score drop after applying for a mortgage?

Your credit score dropped for several reasons. First, when you apply for a mortgage loan, lenders will make what’s called a "hard inquiry." A hard inquiry means that the lender pulls your entire report and scores your credit. This type of inquiry shows up on your credit file, and it can affect your credit score. If you have too many hard inquiries in a short amount of time, some lenders could hesitate to extend credit.

Second, when you took on your mortgage loan, your total debt increased and affected your debt-to-income (DTI) ratio and credit utilization.

You can help ensure you aren't denied credit by improving your score and paying your bills on time, keeping bills out of collection accounts, or even enrolling in credit monitoring or fraud alerts to ensure there is no fraud or errors on your credit.

BUYING A HOME AMID THE PANDEMIC? HERE’S THE CREDIT SCORE YOU NEED

What factors impact your credit score?

Several factors make up your credit score. Credit scoring companies look at:

• Payment history
• Credit Utilization
• Age and mix of credit
• Hard inquiries

Payment history: Your payment history makes up the most significant portion of your credit score. It accounts for roughly 35% of your total credit score. If you need to improve your credit, making your payments on time every month is the fastest way to get an increase.

Total owed: How much debt do you owe compared to your income? Additionally, how much of the total debt you have available are you using? Ideally, you should aim to keep your credit card balances at less than 50% of the available limit to avoid a bad credit score. Your debt makes up 30% of your total credit score.

Age and mix of credit: Having older credit accounts with a history of on-time benefits can significantly improve your credit score. So, if you have older credit cards that you don’t use, consider leaving them open on your credit file to keep your average credit age higher.

What type of debt do you have? Too many credit cards over student loans, mortgage loans or personal loans could affect your credit score. The age of your credit and your credit mix make up 25% of your credit score.

5 BENEFITS OF HAVING A GOOD CREDIT SCORE

Hard inquiries/new debt: New debt and inquiries make up about 10% of your credit score. You can keep your score from dipping and giving you bad credit if you don’t open too many new accounts at one time. Hard inquiries also affect your credit score. When you apply for a mortgage, consider shopping multiple lenders within a few weeks to limit the effect on your credit score.

How will my credit score increase over time?

Credit scores take time. Most lenders report payments and other information to credit reporting companies once per month. It can take several months of good behavior for credit bureaus to report positive effects on your credit score.

Your credit score will increase over time as you continue making on-time payments across all lines of credit including personal loans, student loans, credit cards and mortgage loans. You should focus on reducing these balances and allowing your credit to age.

Negative marks on your credit, such as too many hard inquiries, late payments, foreclosure or lawsuits, affect your credit score less and less as time goes on. Eventually, they will fall off your credit report. If you notice your credit score bump a few points in a month, this could be the reason.

Once you’re ready to apply for a mortgage loan, use an online mortgage calculator to determine your potential monthly payments.

HOW OFTEN DOES YOUR CREDIT SCORE CHANGE?

Your credit will likely be better off in the long run

While your credit score will take a minor hit initially, your credit score will likely be better in the long term. Since a mortgage typically takes 15- to 30- years to pay off, your credit age will increase each year. A mortgage loan helps diversify the type of debt you have. On-time payments over several years will give your credit score a significant boost.

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