Does Buying a House Drop Your Credit Score?

Buying a home is a significant financial undertaking, and its impact on an individual’s credit score is a common concern. Credit scores reflect financial activities, and a large financial decision like purchasing a home can influence this important three-digit number. Understanding how these scores are affected during and after the home-buying journey helps individuals navigate the process.

Understanding Core Credit Score Components

Credit scores, such as those from FICO and VantageScore, are numerical representations of creditworthiness, helping lenders assess the risk of extending credit. These scores are primarily derived from information within an individual’s credit report, with different categories carrying varying levels of importance. A consistent history of making payments on time is the most influential factor, accounting for 35% to 41% of a score.

Credit utilization, which is the amount of credit used compared to the total available credit, is another significant component, making up 20% to 30% of the score. The length of one’s credit history also plays a role, contributing 15% to 21%, as a longer history of responsible credit management is viewed favorably. New credit inquiries and the mix of different credit types (e.g., credit cards, installment loans) each account for 10% to 11% of the overall score.

Immediate Credit Score Impacts During Mortgage Application

When a lender requests to review a credit report as part of a loan application, this is recorded as a “hard inquiry.” A single hard inquiry typically results in a small, temporary dip of a few points.

While multiple hard inquiries for various types of credit, like credit cards, can cumulatively impact a score, mortgage inquiries are often treated differently by scoring models. To encourage rate shopping, many credit scoring models, including FICO and VantageScore, group multiple mortgage-related inquiries made within a specific timeframe as a single inquiry. This “shopping period” typically ranges from 14 to 45 days, allowing consumers to compare loan terms without significant negative impact on their score. Opening any new credit accounts, such as a new credit card or car loan, during the mortgage application process can also negatively affect a score and raise concerns for lenders.

Longer-Term Credit Score Impacts After Mortgage Approval

Adding a new, large installment loan like a mortgage can initially cause a temporary dip in a credit score, as it represents a significant increase in overall debt. This initial drop is observed after closing, as the new account is reported to credit bureaus.

Despite the initial decrease, a mortgage can positively influence various credit score components over time. While the overall debt increases, a mortgage is an installment loan, which is treated differently from revolving debt (like credit cards) in credit utilization calculations; installment loans are not factored into the credit utilization ratio. Adding a mortgage also diversifies an individual’s credit portfolio, improving their “credit mix,” which demonstrates the ability to manage different types of credit responsibly. Consistent, on-time mortgage payments build a strong payment history, the most important factor in credit scoring, leading to a recovery and eventual improvement of the score beyond its pre-mortgage level.

Managing Your Credit Score During Home Buying

Continue making all existing payments on time, as payment history holds the most weight in credit scoring models. Setting up automatic payments for all bills helps ensure consistency and prevent missed payments.

Avoiding new credit applications, such as for credit cards or car loans, is advisable before and immediately after closing on a home. Opening new accounts can trigger additional hard inquiries and decrease the average age of credit accounts, both of which can negatively impact your score. Do not close existing credit accounts, particularly older ones, even if they have zero balances. Closing accounts can reduce the total available credit, negatively affecting credit utilization, and shorten the length of credit history. Keeping credit card balances low, below 30% of the credit limit, helps maintain a favorable credit utilization ratio. Regularly monitoring credit reports for accuracy and promptly disputing any errors is a prudent practice.