Your credit score may suffer after getting a mortgage, but you have nothing to worry about

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Yes, your credit rating will probably go down when you take out a mortgage, but in the long run, you will probably get better. (iStock)

After buying a home, you may be surprised to find that your credit score goes down. For a new homeowner who has likely spent months getting your credit rating higher, this could be a concern. Fortunately, it is not uncommon for your credit score to drop after a major credit purchase. Also, the decrease in your credit score will be temporary if you make payments on time each month.

If you are anxious about your low credit score, it can be helpful to understand a little about the credit scoring model and why your score has dropped.

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

Your credit score has dropped for several reasons. First, when you apply for a mortgage, lenders do what is called a “serious investigation.” A thorough investigation means that the lender extracts your entire report and evaluates your creditworthiness. This type of request appears in your credit file and can affect your credit score. If you have too many complex inquiries in a short period of time, some lenders may hesitate to provide a loan.

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

You can help make sure you are not denied a loan by improving your grade and paying bills on time, keeping invoices out of bills, or even participating in credit monitoring or fraud alerts to ensure there are no fraud or errors on your loan.

You can help by taking preventive measures when looking for a lender. Visit online mortgage broker like Credible to receive personalized rates within minutes without affecting your credit score.

BUYING A HOUSE IN PANDEMIA? YOU NEED A CREDIT EVALUATION HERE

What Factors Affect Your Credit Rating?

Your credit score depends on several factors. Credit scoring companies look at:

  • payment history
  • Use of credit
  • Age and structure of the loan
  • Hard queries

Payment history: Your payment history makes up the most significant part of your credit score. It accounts for approximately 35% of your overall credit rating. If you need to improve your credit, getting paid monthly on time is the fastest way to get a raise.

Total debt: How much debt do you have compared to your income? Also, how much of your debt do you use? Ideally, you should aim to keep your credit card balance under 50% of the available limit to avoid bad credit. Your debt is 30% of your overall credit rating.

Age and composition of the loan: Having old credit accounts with a history of timely payments can significantly improve your credit score. So, if you have old credit cards that you don’t use, consider leaving them open in your credit file so that your average credit age is higher.

What is your debt? Too many credit cards instead of student loans, mortgages, or personal loans can affect your credit score. Your credit age and your credit balance make up 25% of your credit rating.

5 ADVANTAGES OF A GOOD CREDIT ACCOUNT

Heavy requests / new debt: New debts and inquiries account for about 10% of your credit score. You can keep your account from dropping and bad credit by not opening too many new accounts at the same time. Tough inquiries also affect your credit score. When applying for a mortgage, consider buying multiple lenders over the course of several weeks to limit the impact on your credit rating.

You can explore your mortgage options, visit Credible compare rates and lenders.

How will my credit score increase over time?

A credit rating takes time. Most lenders share payments and other information with credit card companies once a month. It can take a few months of good behavior for a credit bureau to report a positive impact on your credit rating.

Your credit rating will increase over time if you continue to make payments on all lines of credit on time, including personal loans, student loans, credit cards, and mortgage loans. You should focus on reducing these balances and resolving the aging of your credit.

Negative marks about your loan, such as too many complex inquiries, late payments, foreclosures, or lawsuits, have less and less impact on your credit rating. Eventually, they will fall off your credit report. If you notice that your credit rating has gone up by several points in a month, that may be the reason.

When you are ready to apply for a mortgage loan, use online mortgage calculator to determine your potential monthly payments.

HOW FREQUENTLY DOES YOUR CREDIT ACCOUNT CHANGE?

Your credit is likely to be better in the long run

While your credit rating will suffer a little at first, it will probably be better in the long run. Since it usually takes 15 to 30 years to pay off your mortgage, your credit age will increase every year. A mortgage loan helps you diversify your type of debt. Making payments on time over several years will dramatically improve your credit score.

When you’re ready to research mortgage lenders, head over to Credible. Credible can help you compare several mortgage lenders at once in just a few minutes. Take advantage of Credible’s online tools and pre-qualify today.

Have a financial question but don’t know who to contact? Write to a safe money expert at moneyexpert@credible.com and your question can be answered by Credible in our Money Expert column.

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