Does Your Credit Score Drop or Go Up When You Buy a House?

The mortgage, not the home, affects your credit score.

The mortgage, not the home, affects your credit score.

Buying a home, or any other property, has no impact on your credit score by itself. Your credit score does not take into account how much property you own or how much money you have in your bank accounts. However, if you're like most people and need a mortgage to make the purchase, that will impact your score.

Mortgage Increases Debt

Thirty percent of your credit score is based on the amount of debt you owe, making that the second largest factor. If you're like most people and took out a mortgage for the vast majority of the purchase price to buy the house, your debt likely increased significantly. As a result, your credit score probably took a hit. On the bright side, this debt is much less damaging to your credit score than other types of debt, such as credit-card debt. However, if you paid out of pocket, your credit score will be unaffected because your debts have not been altered and the amount of money in your savings accounts does not affect your score.

Mortgage Applications

If you took out a mortgage, you likely shopped around at different lenders to get the best interest rate. If so, each time you applied for a mortgage and the lender pulled a credit score, an inquiry was noted. Inquiries affect your score for one year. However, don't be afraid to rate-shop for fear of damaging your credit score, because all of your inquiries for mortgages in a short period of time (generally 14 to 30 days) will count as just one inquiry for credit-scoring purposes.

Payment History

The biggest factor in calculating your credit score is your payment history, which accounts for 35 percent of your credit score. Though you can't immediately undo the negative impact of increased debt, by making on-time payments on your mortgage over the life of the loan you will increase your credit score. However, if your finances go south and you miss payments, are delinquent on your mortgage, or are foreclosed on, your credit score will drop as well.

Types of Credit

In addition to building a positive payment history, taking out a mortgage can also increase the variety of credit you've used. Your types of credit used account for 10 percent of your credit score. For example, if you've previously only used credit cards, taking out a mortgage shows you can handle installment loans, which increases your credit score. However, this increase will be more than offset if you don't make on-time payments.

 

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