My wife and I bought a house last April, and while we were going through the house buying process, I was curious about the role my credit score would play in getting the mortgage and how it would be affected once we got the mortgage.
Of course, I know you need a good credit score to be approved for a mortgage, especially in the current economic climate. But I didn’t know if getting a mortgage would have a major impact on my credit score. I was surprised to see that my credit score wasn’t affected very much at all.
How much does a mortgage affect your credit score?
I’ll show how my credit score was affected once I got the mortgage, and how it looks almost a year later. This is based on my personal experiences, and there are literally hundreds of factors which can go into your credit score, so your mileage may vary.
Before jumping in and showing the actual credit scores before and after our mortgage, I think it’s best to look at some of the factors which explain how it works and what changed in my credit profile. Let’s start by looking at the big picture, then work our way down.
Understanding your credit score. This graphic is from the MyFICO website, and it shows how the factors are weighted for your credit score. So the makeup of your credit score before you apply for your mortgage will help shape how your credit score looks after you get your mortgage.
Tracking my credit score. There are several ways you can track your credit score. Before we got our mortgage I started using a credit monitoring service out of curiosity – mostly I wanted to see how they work and what they track. I signed up and got a copy of my credit scores based on the three major credit bureaus (Equifax, Experian, and TransUnion). Many people say that you should get the FICO credit score directly from MyFICO, but a score based on the major credit bureaus was good enough or my purposes as it was for personal reasons only, not for a specific loan.
If you are looking for an absolutely free credit score (free as in, no credit card required, no trial period, etc.), then check out Credit Karma and/or Credit Sesame. These aren’t the FICO credit scores, but they are based on information from the major credit bureaus and are accurate enough for personal use.
Just applying for a mortgage, or any other loan, can affect your credit score. Applying for any line of credit, including a credit card, car loan, or mortgage can cause a drop in your credit score. The change in your score depends on many factors, including the type of credit you apply for and how many lines of credit you apply for in a time period. A typical hard credit pull can lower your score by 2-5 points, which usually isn’t enough to make a major change in your credit score.
How a mortgage changed my credit score
The following credit scores are mine from various times last year. You can see how applying and being approved for a mortgage changed my credit score. The January credit scores were taken at the request of our landlord to prove we were credit worthy (we had a short term lease before buying a home). The April credit scores were taken when we applied for the mortgage, but before the mortgage closed (we closed about 2 weeks later). There were no other credit applications or credit pulls during that time. The December credit scores reflect our credit score after our mortgage had been active for 8 months, and after I had opened a new line of credit (a credit card with a $25,000 limit <<— no, I didn’t ask for that much, they just gave it to me. I would have been happy with a $5,000 limit!).
Jan 17, 2011 (before applying for a mortgage):
- Equifax – 803
- Experian – 801
- TransUnion – 798
Apr 1, 2011 (immediately after mortgage approval, but before closing):
- Equifax – 792
- Experian – 777
- TransUnion – 795
Dec 28, 2011 (8 months after mortgage became active):
- Equifax – 811
- Experian – 796
- TransUnion – 788
Takeaways from applying for a mortgage
Multiple credit applications may or may not hurt your credit score. It’s always a good idea to shop around for mortgage rates when you are buying a house, and the credit bureaus realize that people are going to shop around. So multiple mortgage inquiries in a 45-60 period may only count as one credit inquiry, and shouldn’t affect your credit score too much. But you might see a larger drop in your credit score if you are also applying for credit cards or car loans at the same time. It’s best to secure your mortgage before opening other lines of credit.
Multiple lines of credit in a short time frame may not hurt you. While you should always secure your mortgage before applying for new credit cards, car loans, or other loans, opening a credit card after your open a mortgage might not hurt you. In fact, the credit simulator at Credit Karma showed that opening a credit card with a $10,000 line of credit would actually improve my credit score, even though it would decrease my average age of credit and increase my credit limit. This seems to have been the case, as I opened a credit card in early December in my credit score has improved.
Your credit score might go down at first, but should rise after awhile. Getting a mortgage will most likely cause your credit score to drop – but that should be a temporary event as long as you make your mortgage and other loan payments on time. Your score should rise after you make payments on your mortgage for a few months. In some cases, your credit score may end up higher than before you got your mortgage. Again, it all depends on the specific factors affecting your credit score.
You might expect to see something like this:
- Expect your credit score to drop a few points when you apply for your mortgage
- Expect your credit score to drop a little more when your mortgage is approved
- Your credit score will stabilize
- Then your credit score should begin improving, provided you make all loan payments on time (all loan payments including your non-mortgage debt).
Your results may vary. As I mentioned earlier in this article, your results will depend on many factors, such as your credit history, payment history, total number of lines of credit, average age of credit, and other factors.