Getting a mortgage to buy a house affects your credit score in both positive and negative ways. Your score considers five major areas of your credit use, all of which the mortgage impacts. Overall, expect your score to drop slightly at first and bounce back as you make payments on your mortgage.
New Credit
The main area in which your score will drop is the new credit portion of your score, which is about 10 percent of your overall score. When you apply for your mortgage and the lender checks your credit, this credit inquiry appears on your report and slightly lowers your score. If multiple lenders check your credit, they will only count as one inquiry if they are in a time period of two weeks or less. After you get the mortgage, the presence of a new account on your credit report also lowers your credit score.
Types of Credit
Adding a mortgage to your credit report can improve your credit score by affecting the 10 percent of your score that considers the types of credit you have. The major distinction is between revolving credit, like credit cards, and installment credit, like mortgages, car loans and student loans. If you did not have any installment credit accounts before your mortgage, it should be especially helpful. Even if you had a different type of installment account, the mortgage will slightly improve your score in this area.
Amounts Owed
Borrowing money to buy a house significantly increases the amount of debt that appears on your credit report. About 30 percent of your score is based on the amounts you owe. However, your score does not only consider the raw amount, but also the relationship between what you owe to what you borrowed. A mortgage will hurt you in this area at first because you are adding a large debt and the balance is the same as what you borrowed. As you pay down your mortgage, your score will improve.
Payment History
Taking out a mortgage has no immediate effects on your payment history, which is 35 percent of your credit score, but it has potential to make or break you in the future. Paying your mortgage on time every month will cause your credit score to increase because you are making consistent large payments. On the other hand, if you miss a mortgage payment, your credit score will drop. If you fall way behind and the lender forecloses, this will seriously hurt the payment history portion of your score.
Length of Credit History
The last 15 percent of your credit score is based on the length of your credit history. Your score considers your overall length, which your mortgage should not affect, but also the average age of your accounts. Therefore, the mortgage will slightly lower your average account age at first, but then add to your length of credit history as you repay it over many years.
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