How Getting a Mortgage Can Improve Your Credit

How Getting a Mortgage Can Improve Your Credit by Cat Kluss.

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mortgage

The truth of the matter is that getting a mortgage can both help and hurt your credit score, and there are a number of small factors that are going to be at play. As a result, it can be kind of tricky to predict exactly what the impact of getting a mortgage will be on your credit score.Given that anyone giving you a mortgage is going to take a close look at how much money you make, how much debt you're carrying and what your credit history looks like, by getting a mortgage you essentially have your lender vouching for your credit worthiness.

How does a mortgage help your credit score in the long term?

Over the long-term, having a mortgage on your credit report should help your credit score significantly. If you make the payments on time, it shows a high level of personal financial responsibility. If you can be trusted with a mortgage, for example, you can probably be trusted with a credit card.

How can a mortgage hurt your credit score in the short term?

Initially, taking on a mortgage can hurt your score. Obviously your debt-to-income ratio and debt-to-credit ratio changes significantly when you take out a mortgage.As a result, future lenders may perceive you as stretched a bit too thin. However, once you prove that you can handle it, a mortgage should swing back into the positive column. In order to keep it there, you'll need to be responsible.

Does having different types of debt affect your credit score?

Having a mortgage will also balance out your credit report if all that you currently have on it are credit cards. You want to have both revolving accounts, which are credit cards, and installment accounts, such as a mortgage, on your credit report. That demonstrates that you are capable of using multiple forms of credit responsibly. However, that is only going to make a small difference. It can impact about 10 percent of your credit score, but that's' about it.

How significant is missing a mortgage payment on your credit score?

Whereas missing a credit card payment hurts your credit score, missing a mortgage payment can be nearly catastrophic. Since your secured debts are larger and have larger payments, being late on one of them can be seen as a major mistake. You'll obviously want to be very careful not to do that.

When you get a new mortgage you might see a drop in your credit score for a period of about six months. This depends on several factors and is not necessarily always the case. After that, you should regain those points and then continue climbing toward a higher credit score as you make more payments and built positive payment history.

Monica Mancano

Monica Mancano

REALTOR®, SRES®, MRP, AHWD
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