Yes buying a house will impact your credit score negatively at first, but if you make payments on time regularly then buying a house will have a positive impact on your credit score.
At first, when you apply for a loan, your lender will issue a hard inquiry which will negatively impact your credit score. According to FICO, a single hard inquiry should only have a five-point or less drop to your credit score. Since hard inquiries are a common part of purchasing a home, this is an important point to keep in mind if you have bad credit.
After the sale has been finalized, you may see another small drop in your credit score. This is because any loan that adds to your total debt will slightly negatively impact your credit score.
While purchasing a home has a negative impact on your credit score initially, you will be able to recover and even improve your credit score quickly as you’ll be making monthly payments back to your lender and your lender will be reporting these payments to the credit bureaus. Thus you are building a better credit track record which helps to increase your credit score.
Let’s jump into a bit more detail about how buying a house benefits your credit score.
How Buying a Home Improves Your Credit Score
Buying a home can increase your credit score in three different ways:
- Establishing a record of on-time payments
- Expanding your credit mix
- Lengthening the span of your credit history
These factors combine over time to deliver positive gains to your credit score. This is because roughly 35% of your FICO credit score is based on your payment history. As a result, meeting your monthly mortgage payments in the first year will help to increase your credit score.
Creating a stronger credit mix is also another factor the credit bureaus will look at according to Equifax who is one of the three. And showing consistent payments and responsibility over a longer time also helps to build “trustworthiness” which can help lead to a higher credit score.
For these reasons, buying a house can help to improve your credit score. However, missing payments on your mortgage can affect your credit score negatively which is why it’s important to get a mortgage you can afford.
How Missing Payments Impacts Your Credit Score
Missing your monthly mortgage payments will negatively impact your credit score. Having missed payments show up on your record decreases trust for future lenders and shows you may not be as “credit worthy”. The drops can happen fast so it is important that you always have money set aside to cover your mortgage payments.
Thankfully, most lenders will not report a missed payment until after 30-60 days, which gives you time to make up for any missed payments. Every lender is different, so talk to yours about these issues before agreeing to a mortgage in order to protect yourself in the future.
In the end, buying a house will impact your credit score positively over time if you can keep up with your monthly payments. Not to mention building a better credit history may eventually qualify you for better refinancing rates which can help you reduce your monthly payments.
This is why purchasing a house will impact your credit score both negatively and positively while being a great way to improve your credit score over time.