How Does a Mortgage Affect Your Credit Score?

When it comes to buying a home, there are tons of questions that pop up. If you’re a first-time homebuyer, you may be curious about how rates work or how a loan repayment schedule is decided upon. Another important question you may have is, “Does a mortgage affect my credit score?”

The short answer to that is yes — and for a few different reasons. Believe it or not, mortgages can both hurt and help credit scores — sometimes simultaneously. The reasons for this are a bit complicated, but the gist of it is that the FICO scoring model includes multiple categories that are impacted by your mortgage. Your new mortgage loan may raise your score in some categories but lower it in others.

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The upside is that mortgage loans will help raise most people’s credit scores more than it will hurt them. If you’ve been considering purchasing a home but are afraid of the issues a mortgage loan could cause with your credit, feel free to keep shopping around for the best rate. Chances are your credit score will recover after buying a home, even if it does some temporary damage. Here’s what you need to know.

In this article

    Does having a mortgage hurt your credit score?

    In general, a mortgage loan will help improve your credit score. If you stay up to date with payments (and, more importantly, if you make them on time, every time), you won’t have much to worry about. That said, you may see a slight dip in your credit score right after you take out your loan.

    Here’s how having a mortgage can affect your credit score, and why:

    [Read: 5 Tips for Navigating the Mortgage Underwriting Process During Covid-19]

    Credit inquiry: Does applying for a mortgage hurt your credit? The short answer is yes. When you first apply for a mortgage, the lender checks your credit report, which is also known as a credit inquiry. The score drop from this is pretty minor. Most borrowers only see a drop of about five points.

    Missed payment: Unfortunately, the credit bureaus don’t advertise the exact amount your score will drop with a missed mortgage point, but we do know a few things that affect their reasoning:

    • Your score drops more the higher it is at the time of the missed payment. If your score is already low at the time of the missed payment, you will see a dip, but not as much if it’s around 800.
    • Late payments less than 30 days usually don’t hurt your credit score. When you pass the 30, 60, and 90 day marks, that’s when your score begins to go down.
    • Recent late payments matter more than ones that occurred well into the past. It suggests to lenders that your financial situation has changed and it’s causing you to miss payments now due to financial issues.

    Initial credit age: A new loan affects two categories in your credit score: Length of credit history and new credit. Any type of new credit will drop these two categories at least slightly. However, these score drops are quickly offset by two things: making your monthly payments on time and diversifying the types of credit you have.

    It’s also possible that you may not see a drop at all when it comes to these categories. Combined, payment history and credit mix make up 45% of your credit score, whereas credit history and new credit only make up 25%. If your other categories are high and your score is high overall, it may not impact you much.

    [Read: 7 Crucial Steps to Buying a Home in 2021]

    Amounts owed: Having a mortgage will inflate the overall amount owed on your credit report. When this happens, your credit score goes down. However, keep in mind that other things affect this category too, such as credit cards and student loans.

    As you pay down your debts, your score will improve — so this blip is only temporary. Just remember to keep the balance on your credit cards low because having credit available while also paying down your debt shows you are wise with money.

    How does a mortgage help my credit score?

    For the most part, a mortgage strengthens most credit scores assuming the monthly payments are made on time.

    [Read: House Hunting During the Pandemic? 8 Ways to Win a Bidding War]

    Payment history: The biggest contributor to your credit score is your payment history, which accounts for 35% of your credit score. Your payment history is exactly what it sounds like — a detailed history of both your on-time and late payments.

    There are several different types of accounts that affect this category. These include:

    • Retail accounts — Open a store card with your favorite retailer and your payment history for that account will show up in this category.
    • Credit cards — Have a Discover, American Express, Visa, or MasterCard credit card? Your payment history is included in credit cards for these types of accounts.
    • Installment loans — Loans, including student loans, car loans and mortgages, are types of installment loans where a payment is made each month until the loan is paid off. Lenders love to see a positive history with this type of account because paying off a large loan demonstrates true financial responsibility.

    There are a few things to keep in mind as well when considering your payment history. This includes:

    • The amount you owe — If you are overdue on an account, how much money is still owed to the lender? The total amount you owe can play a factor in your credit score.
    • The total number of late payments — How many late payments do you have on your record? One or two isn’t a big deal. When it becomes a habit, though, that’s when credit bureaus take notice.
    • The recency of late payments — How much time has passed since your last late payment? The more time that has passed, the better. 
    • Total number of accounts — How many accounts do you have that require monthly payments? The more accounts with balances that you are paying back, the harder your score takes a hit.
    • Length of time you’re late on payments — If you are overdue with an account, how overdue are you? 30 days? 60 days? 90 days? The longer you’re late, the more damage it does to your credit.

    Because your history with mortgages affects a few different areas of your credit score, paying it on time every month will dramatically strengthen it. Even if the mortgage temporarily lowers your score, it can propel it upward in the long run — as long as you are responsible with your payments.

    Diversifying credit: Lenders like to see a strong profile with multiple types of credit products. These include credit cards, student loans, car loans and mortgages, which is a mix of revolving credit and installment loans. If your history revolves solely around credit cards, a mortgage will ‘diversify’ your credit history.

    Having a good mix of credit products strengthens your credit mix, which accounts for 10% of your credit score. That’s not the biggest factor, of course, but it does play a role in calculating your score.

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    Lauren Ward

    Contributing Writer

    Lauren Ward is a personal finance writer living in Virginia’s Blue Ridge Mountains with her husband and three children. In her spare time she enjoys board games and gardening.