Your credit score helps you qualify, and your mortgage can help your credit score
We’ve talked before about how important your credit score is to any mortgage proceeding. Your credit rating is an indication of how reliably you handle paying back loans given to you, so it makes sense that it would have an effect on how you qualify for a mortgage. What most gloss over though, is how a mortgage then affects your credit score once you’ve been approved. A mortgage is like any credit usage – you take out a loan, and then pay it back over time plus interest – which is then reflected on your credit report.
An Initial Hit
Any loan application that results in a hard credit check is going to hurt your credit short-term – and so will a mortgage. Additionally, a mortgage is typically the largest loan an American consumer will ever take out, and a big part of your credit rating is your ratio of debt to income. As the monetary value of loans you’ve taken out increases (this is referred to as ‘utilization’), your debt to income ratio goes down, which can and will hurt your credit rating. If you’re about to take on a mortgage and already have some amount of credit card debt, finding ways to eliminate that non-mortgage debt can put you in a better credit position.
A Healthy Mix
That’s not to say, however, that a mortgage is explicitly bad for your credit rating. Mortgage experience is a key factor in determining a mature credit profile for a borrower, and a mortgage is seen as more ‘responsible’ debt than things like credit cards or payday loans. This means that having a healthy mix of credit utilization can help your credit rating, and the variety in your credit usage profile can decide up to 10% of your credit score. So long as other aspects of your credit history aren’t holding you back, long-term a mortgage can boost your credit score!
It’s All Up to You
Initially, taking out a mortgage loan will hurt your credit score short-term, but will create a more varied credit profile and potentially boost your credit long-term. However, whether or not a mortgage really helps or hurts your credit is ultimately up to one person: you. Missing payments on your mortgage can massively affect your credit score in a negative way, which is the last thing you want as a credit-conscious consumer. By staying on top of your mortgage payments you’ll demonstrate to credit providers that you are a responsible borrower in a way that Americans without mortgage history just can’t.
It’s important to make sure that you understand every part of how a mortgage will affect your financial health, which is why we always recommend that Americans searching for a home should work with a mortgage broker. If you’re starting on the path to homeownership, reach out to us and we’ll help you at every step of the way, from starting your application all the way through to closing, and make sure you know exactly what your loan will mean for you!