Consumers often obtain loans to finance large purchases and buying a home can be one of the largest purchases a consumer makes. A mortgage loan will appear on your credit report and so will the credit history associated with that account. If you're selling your home, it's beneficial to understand how this action can affect your credit.
Debt
If you have a mortgage loan on your home, selling it will affect the level of debt present on your report. Part of your FICO score reflects yout total amount of debt. This is 30 percent of your score. When you sell your home and pay off the associated mortgage loan, this reduces your debt levels. The less debt you have on an installment loan versus the amount of the original loan demonstrates that you can manage credit well and this will raise your credit score, according to FICO. Of course if you don't have a mortgage loan, selling your home will not directly affect your credit.
Credit History
Mortgage loans usually have a loan term of several years, even decades. Consumers generally take out mortgage loans with a repayment period of 15 to 30 years. Your FICO score includes within its calculations the average length of your credit history, which is 15 percent of the score. The longer your credit history, the higher your FICO score. Once you pay off your mortgage loan, some lenders may cease reporting that loan to the bureaus. Under federal law, however, they can continue to report it for up to 10 years if the history of the account is good and up to seven years if the account has derogatory information. The removal of the account can shorten the average length of your credit history, which can lower your credit score and can be especially damaging to your credit if that account is the oldest account on your report.
Credit Type
FICO also looks at the mix of credit types found of your report. Credit mix refers to the different kinds of credit accounts, such as credit cards, mortgage loans, charge cards, student loans and store cards, among others. FICO likes to see a variety of credit types since this indicates that you can manage credit across different platforms. Credit mix is 10 percent of your score and the removal of the mortgage loan can reduce the variety of credit on the report and this may lower your score as well.
Payments
Until you sell your home, make sure you keep up with the mortgage payments. At 35 percent, the bulk of your FICO score is how well you pay your debts. Delinquency on those accounts can have a very damaging effect on your score. One 30-day late payment can drop your FICO score by as much as 45 points. A foreclosure can be even more devastating since it can lower your score by up to 160 points. That can be the difference between good credit and bad credit.
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