The effect buying a home has on your credit basically, boils down to how you manage your credit throughout the lending process and how you deal with your mortgage payments after you become an official homeowner.
How Does My Credit Score Affect My Mortgage?
Obviously, your credit plays a big role in the loan approval process, so if you’re just starting to think about what credit score is needed to buy a home and want to see where your credit stands, Credit.com’s free Credit Report Summary will hook you up with two credit scores, plus a review of how you’re doing in each of the major credit scoring factors so you can understand what’s impacting your scores.
It’s important to know these factors as you start the lending process because the better your credit scores, the better the interest rates you’ll qualify for, which can save you a lot of money over the next 15 to 30 years.
If you find that your credit isn’t where you’d like it to be, it’s a good idea to pull your credit reports and see if there are any errors you can correct that will improve your scores. You can get your free credit reports every year at AnnualCreditReport.com.
… And How Your Mortgage Affects Your Credit
When you apply for a home loan, the lender will do a hard inquiry into your credit, which creates a small and temporary ding to your credit scores. Luckily, if you’re trying to shop around for the best interest rates at different banks, you can prevent multiple hard inquiries by applying to all of the lenders in a short time period or by going through a mortgage broker. Credit scoring models recognize that you’re applying for a loan and only consider these applications as one inquiry.
Once you’ve started making your mortgage payments, keeping your payments up to date can have a very positive effect on your credit. Likewise, late or missed payments can be very negative. That’s because your payment history accounts for 35% of your credit score. So do everything you can to stay on track with your mortgage payments.
A mortgage loan also adds a significant installment loan to your credit file, and this is good for your mix of credit, which accounts for 10% of your credit score. A good credit mix indicates you can responsibly manage revolving credit accounts, such as credit cards, and installment loans, such as home and auto loans.