Our credit scores are one of the most important numbers that we’ll carry with us through our lives. And a mortgage is one of the biggest monetary transactions you will make in your lifetime. So, what exactly how does a mortgage affect your credit score? Does having a mortgage help your credit score or hinder it?
Not many people think to ask these questions when they get a mortgage and some don’t even know what their own credit score is. In this day and age where it’s crucial to keep that score as high as possible, there should be no excuse for not knowing where you stand in the eyes of lenders.
Even the slightest change in your finances can have a huge impact on your credit score, good or bad, so it’s understandable that something as large as a mortgage might do the same. We’re here to uncover the truth how does mortgage affect credit score so you can be prepared for any changes in your financial standing.
The Benefits Of A Mortgage On Your Credit Score
As the biggest debt that most people will ever get themselves into, having a mortgage will have a huge impact on your credit score. Mortgages are just a fact of life for many of us, and there’s nothing wrong with having to borrow money in order to get your dream home and have somewhere stable for your family to live.
Not many people are aware, but getting into debt with a mortgage can actually be beneficial for your credit score. Although some people might be cautious about getting a mortgage because it might reflect poorly on their overall score, the best way to combat that is by making your repayments.
According to those who compile your credit score, FICO, about 35 percent of your total score is calculated based on your repayments. How often you pay, how much you pay, if you’re ever late or miss a payment altogether will be seen and noted by FICO and have a huge impact on your score. When you have a mortgage, making regularly scheduled payments of the full amount is the simplest way to build your score back and up and keep it at a desirable level.
Another way to ensure that your credit score stays healthy is to not buy a home that’s beyond your means. FICO and other agencies look at something called a debt to income ration. This means that you should have accumulated debt repayments of no more than 36% of your income, with your mortgage taking up only 28 percent of that or less. By purchasing a house that will keep this ratio low, you’ll be benefiting your overall credit score.
The final huge benefit to having a mortgage in terms of your credit score is that once you’ve been granted a mortgage you’ll be seen as responsible in the eyes of borrowers. Although it’s quite a large amount of debt to have, it’s also the most serious kind, and anyone who has been accepted for this type of loan has usually proven that they’re responsible with money and responsible with their debts.
The Negative Effects On Your Credit Score When You Get A Mortgage
Although there are plenty of ways that your credit score can benefit when you get a mortgage, there are also some negatives to be aware of. For most borrowers, immediately after purchasing their house and getting their mortgage, they’ll notice a dramatic drop in their credit score.
While this is completely normal as you just took on a lot of debt, it means you won’t be able to apply for any other form of credit for at least six months. However, with regular payments on your mortgage as mentioned earlier, you’ll be able to build your score back to its pre-mortgage state in no time.
No matter how hard we try to stay on top of things, sometimes life just happens. If for whatever reason you’re unable to make mortgage repayments or are late with them, your credit score will take a huge hit. It’s always best to have a backup plan for your mortgage repayments like a savings account or income insurance that will keep you covered should the worst happen.
If there’s ever a time where you think you might be late with a mortgage payment, its best to speak with your bank or financial institution to let them know. Some can offer extensions on payments and will avoid reporting the bad debt to anyone else, so it will stay clear of your credit score so long as you honor the new arrangements.
Keeping A Healthy Credit Score
Our credit scores are extremely important in adult life, and they need to be treated with the care that they deserve. Something as simple as missing a payment can put your credit score back phenomenally and take years to rebuild. Having a mortgage might mean this score takes an initial hit, but in the overall picture, it’s far more beneficial for it.
Finding a lender to give you a mortgage with a bad credit score would be near impossible these days, so if you’ve managed to be accepted for one it means you’re doing something right. There are ways to keep an eye on your credit score for yourself so you can actively work at keeping it healthy, and these are our responsibilities to maintain.
Owning a home comes with many responsibilities and one of the biggest is the debt that you’re now responsible for. Be smart when purchasing a home and try not to get in over your head with a purchase that you can’t afford, otherwise the monthly struggle to make repayments could take its toll on your family and your credit score.