Does a New Mortgage Lower Your Credit Score?
Understand the complex relationship between securing a new mortgage and your credit score. Learn what to expect for your financial profile.
A credit score is a numerical representation of an individual’s creditworthiness, typically a three-digit number ranging from 300 to 850. Lenders use this score to evaluate the likelihood of an applicant repaying borrowed money on time. It helps them determine whether to approve applications for financial products like mortgages, credit cards, or auto loans, and also influences interest rates and terms. The score is derived from information in credit reports, which detail an individual’s credit history, including active accounts, debt levels, and repayment patterns.
The Initial Credit Inquiry
Applying for a new mortgage initiates a “hard inquiry” on your credit report, which can lead to a small, temporary reduction in your credit score. Lenders conduct these inquiries to assess credit risk before extending a loan. A single hard inquiry typically results in a decrease of fewer than five points on a FICO Score, though the impact varies based on individual credit histories. This inquiry remains on your credit report for up to two years, but generally affects your credit score for only 12 months.
Credit scoring models recognize that individuals often shop for the best mortgage rates. To accommodate this, multiple inquiries for the same type of loan, such as a mortgage, within a specific timeframe are usually treated as a single inquiry. This “rate shopping” window typically spans 14 to 45 days, depending on the credit scoring model used. Shopping with several mortgage lenders within this period should not significantly multiply the negative impact on your score.
How a New Mortgage Affects Your Credit Profile
Beyond the initial inquiry, a new mortgage account can influence your credit profile. Taking on a large new debt obligation, like a mortgage, initially increases your overall debt burden. This can cause a short-term dip in your score.
A mortgage introduces an installment loan to your credit mix, which can be beneficial long-term. Lenders prefer to see a diverse credit profile that includes both revolving accounts, like credit cards, and installment loans. However, the initial increase in overall debt from a new mortgage can temporarily outweigh the positive effect of an improved credit mix.
Opening a new account, especially a large one like a mortgage, can lower the average age of all your credit accounts. A longer credit history generally indicates more established financial responsibility. The decrease in average account age can contribute to the initial score reduction after obtaining a mortgage.
Factors Determining the Score Change
The extent to which a new mortgage impacts a credit score varies significantly. One factor is your starting credit score; those with higher scores may experience a more noticeable, albeit temporary, decrease compared to individuals with lower scores. This is because there is more room for a score to fall from a higher starting point.
An individual’s overall credit history and financial health also play a role. People with a long, established history of responsible credit use, including consistent on-time payments and diverse accounts, may see a smaller initial dip or a quicker recovery. Conversely, a limited credit history can make the score more sensitive to new credit activity.
Existing debt levels are another important consideration. If a person already has high credit utilization on other accounts, the addition of a significant mortgage debt might lead to a more pronounced negative effect. Maintaining low credit utilization on other accounts is generally favorable. Having recently opened many new accounts or accumulated multiple credit inquiries can exacerbate the score reduction when a new mortgage is added.
Credit Score Recovery and Management
The initial dip in a credit score following a new mortgage is typically temporary, with scores recovering over time. Consistent, on-time mortgage payments are the most significant factor in this recovery and can substantially improve your score. Payment history accounts for a substantial portion, typically 35%, of credit scoring models.
The gradual aging of the new mortgage account also contributes positively to score recovery. As the mortgage matures, it lengthens your credit history, which is a favorable factor.
To support this recovery, maintain low credit utilization on other revolving accounts, such as credit cards. Avoiding opening many new lines of credit shortly after obtaining a mortgage can prevent further inquiries and new account impacts. Setting up automatic payments for all bills can help ensure timely payments and contribute to a steady increase in your credit score.