Applying for a home loan is often a nerve-wracking process. While all your dreams of homeownership are wrapped up in the application process, you should be aware that even applying for loan can negatively affect your credit score. Once you are granted a mortgage, this too will likely lower your score but, in the long run, you will also be able to increase your score if you handle your home loan responsibly.
A consumer credit score is a number, usually between 300 and 850, that tells the lender how risky it would be to give you a loan. The higher the number, the less risk you represent to lenders. To determine this number, lenders look at your credit reports for specific information about your borrowing history, such as how often you missed payments, how much money you owe, the types of loans you have and how many new loans you have recently applied for. You can raise or lower your credit score any time you perform any activity as a borrower.
The simple act of applying for mortgage can lower your credit score. Whenever you apply for a loan, the lender will look at your credit score. This is what is known as a credit inquiry, or sometimes a hard inquiry. The credit reporting companies include this inquiry on your credit reports and, because the number of new loans you apply for is part of the calculation that determines your score, your credit score will likely decrease somewhat when this happens. However, applying for a loan from multiple lenders within the same 30-day period will not have a significant effect on your score, according to myFICO.com.
Applying for and getting approved for a new home loan is a significant factor in your credit score. Not only will you take on a greater amount of debt, but your mortgage will likely be the single largest loan you have. Once you are accepted for a loan, that information will get recorded on your credit report and you'll probably see a decrease.
As soon as you start making regular payments on your mortgage, your credit score can start going back up. Making regular mortgage payments increases your score because it shows a positive payment history, adds an additional type of loan to the types of credit you use and, more importantly, shows that you can responsibly manage your debts. The longer you continue to make regular payments and the lower you make your outstanding loan balance, the more your score rises.
Roger Thorne is an attorney who began freelance writing in 2003. He has written for publications ranging from "MotorHome" magazine to "Cruising World." Thorne specializes in writing for law firms, Web sites, and professionals. He has a Juris Doctor from the University of Kansas.