If you’ve started the home buying process, you likely know how important a solid credit report is to securing financing from a lender. But, what happens to your credit after you buy a home?
Does buying a house help your credit or hurt it? Let’s find out how your credit score is affected.
Owning a home is part of the American dream. It provides stability, equity, and a sense of pride and accomplishment. But does being a homeowner also help raise your credit score? The answer is yes, with some caveats.
How Buying a Home Initially Affects Your Credit Score
When you first buy a home, your credit score will likely drop a little. Here’s why:
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Mortgage inquiries When you apply for a mortgage lenders will check your credit report. Too many inquiries in a short period can lower your score.
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New debt: A mortgage is a large new debt obligation. This increase in your debt-to-income ratio can lower your score.
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Credit mix: Even though mortgage debt is considered “good debt,” it can still initially lower your score by changing your credit mix.
Don’t worry too much about this short-term dip If you make consistent on-time mortgage payments, your score will start climbing in a few months.
How Owning a Home and Making Payments Improves Your Credit
The key to improving your credit score as a homeowner is to make regular, on-time mortgage payments. Here are some of the main benefits
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Payment history: Your payment history makes up 35% of your FICO score. On-time mortgage payments will significantly boost this portion.
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Credit mix: Having a mortgage shows lenders you can handle diverse credit types like installment loans and revolving credit. This will help improve your score.
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Lower utilization: As you pay down your mortgage, your overall utilization rate drops, helping your credit score.
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Credit history length: Keeping your mortgage long term adds to your average length of credit history, another factor in your score.
As you can see, responsibly managing a mortgage has many positive effects on your credit profile over time.
How Home Equity Can Also Help Credit
Building home equity provides another potential boost to your credit:
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HELOC: A home equity line of credit (HELOC) adds an additional active tradeline, further diversifying your credit mix. Managing this line of credit responsibly can improve your score.
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Refinancing: When home values rise, refinancing to a lower rate keeps your primary mortgage tradeline open longer while lowering your debt. Both help your credit score.
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Cash-out refi: Tapping home equity for debt consolidation via a cash-out refinance can improve your utilization rate and mix of credit. Again, make sure to manage the new consolidated debt responsibly.
Tips for Improving Your Credit as a Homeowner
Here are some top tips for homeowners looking to build their credit:
- Make mortgage payments on time every month
- Avoid taking on too much other new debt after getting a mortgage
- Keep old credit card accounts open to preserve your length of credit history
- Limit credit card spending to keep balances low
- Consider applying for a HELOC or refinancing when it makes sense
- Sign up for credit monitoring alerts to help spot issues
- Review your credit reports regularly to check for errors
Follow these best practices, and you’ll be well on your way to enjoying a high credit score as a homeowner.
How Much Does Owning a Home Improve Your Credit Score?
It’s difficult to quantify exactly how much homeownership will improve your credit score. It depends on your specific situation, including:
- Your starting credit score before getting a mortgage
- The size of your mortgage payment and overall debt
- How reliably you make those mortgage payments
- Your other credit accounts and behaviors
- How long you’ve owned your home
However, research shows that homeowners tend to have significantly higher average credit scores than renters or people who still live with family.
One study by Experian found that on average, homeowners have a credit score 44 points higher than non-homeowners. Other reports show differences of 50 points or more.
So while owning a home may not instantly skyrocket your credit, responsible mortgage payments over time can raise your score significantly compared to renters.
Potential Downsides to Homeownership on Credit
While responsible mortgage payments clearly help raise your credit score, it’s important to note potential downsides:
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Missed or late payments will damage your score and credit history. Set up autopay to avoid issues.
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Taking equity out of your home via lines of credit or cash-out refinancing can hurt if not managed carefully. Don’t take out more than you need.
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Buying more house than you can truly afford will make it harder to keep up with mortgage payments and other debts. Be conservative with your budget.
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Job loss or unexpected expenses can quickly turn mortgage debt from “good” to harmful. Have an emergency fund in savings as a buffer.
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Selling your home fairly quickly after buying can shorten your length of positive mortgage account history. Try to avoid this if possible.
The bottom line is owning and properly managing a home has many benefits for your credit score. But you have to be financially ready for the commitment to maximize the advantages while minimizing risks.
Frequently Asked Questions
How long does it take for your credit score to improve after buying a house?
It typically takes around 6 months of consistent on-time mortgage payments for your credit score to improve and recover after an initial drop from getting a mortgage. Maximum improvement may take over a year.
Does selling your house hurt your credit score?
Selling your home does not directly hurt your credit, but it cuts short your length of positive mortgage account history. This can limit the boost homeownership provides your score.
What credit score do you need to buy a house?
Most lenders look for a minimum credit score of around 620 to qualify for a conventional mortgage. However, scores of 700+ will get you better interest rates. Talk to lenders to see your specific options.
Can first-time home buyers improve their credit score?
Yes. First-time home buyers who make diligent on-time mortgage payments can see significant credit score improvement in the months after getting their first mortgage. Just be sure your finances are in order first.
Final Thoughts on Homeownership and Credit Score
Owning and properly managing a home has clear benefits for improving your credit score over time. Just make sure you take on a realistic and manageable mortgage, consistently make those payments on time every month, and avoid piling on too many other debts. Follow this blueprint for credit success as a proud homeowner.
How Much Your Credit Score Dips When You Take Out A Home Loan
According to FICO®, your credit score can slide by five points when your lender pulls your credit. That’s because a credit check from an application is a hard inquiry. A soft credit inquiry is when you check your own credit or a lender with whom you already have a loan just takes a look to make sure you’re on target.
Once you actually take out the home loan, your credit score can potentially dip 15 – 40 points, depending on your current credit. This decrease probably won’t show up immediately. You’ll likely see it within 1 or 2 months of your closing, when your lender reports your first payment.
On average, it takes about 5 months for your score to climb to its previous level as you make on-time payments, assuming the rest of your credit habits stay strong.
On-Time Mortgage Payments Equal Higher Credit Scores
A home loan will eventually help your credit history because making payments consistently will whittle down the loan balance. Your credit card debt, on the other hand, can continue to climb, which is why it’s more apt to negatively impact your credit score.