The Impact of Home Ownership on Your Credit Rating

Buying a home is the greatest financial achievement for many people’ lives. But what does this momentous process, from applying for a mortgage to sending in years of payments, do to your credit score? The relationship between credit score and home ownership is complex and robust. Knowing this connection can help you make life choices.

Discover how home ownership influences your credit rating. Learn the benefits and potential pitfalls to enhance your financial health and credit score. while making regular payments and upon finally paying off the balance — and what you can do to make sure it has minimal negative impact.

By the end, you will understand how homeownership impacts credit and that when used appropriately, a mortgage can be an important vehicle for establishing good credit with a mortgage.

1. Before You Buy: What to Know Before Applying for a Mortgage

The Hard Inquiry

• What it is: When you’re in the process of applying for a mortgage, any credit inquiry that’s made will be categorized as hard because a lender has submitted one to check your creditworthiness. It’s a cheque that is scrutinised on your report.
• Impact: A hard inquiry mortgage credit score may lower a borrower’s points by the single currency denomination (for example, 640 becomes 639). The effect is normally slight and becomes less noticeable over time.
• Strategy: To lessen the blow, don’t make multiple hard inquiries for different types of credit (a car loan or lease, a new credit card and a mortgage) in rapid succession.

Note on Rate Shopping

Most credit scores (including FICO and VantageScore nationwide) geniuses know that multiple inquiries on the same loan type within a short period of time—say, 14-45 days—are for “rate shopping”. They will consider all of them as one inquiry, so this does not damage your credit scores for a mortgage.

Credit Score Requirements

• Pre-Approval Stage: A high credit score is important for obtaining a pre-approved mortgage and having the ability to get a lower interest rate, something that can save families thousands of dollars over the life of their loan.
• Impact of Approval: recommends you wait to apply for a home until you are approved in order to avoid additional enquiries on your credit report, adding that the “new line of huge new credit” from approval can be good news when it comes time for them to balance out their risk.

2. While Owning a Home: The Continuing Affect of Mortgage Payments

This is the point at which you feel most of that weight when it comes to your credit score.

The Power of Timely Payments

• What it is: How consistently you make on-time payments is the single most important factor in your credit score (often making up 35-40% of a consumer’s total calculation). Each timely mortgage payment adds a positive, powerful entry to your credit report.
• Effect: Over time, consistent, timely payments throughout the years will methodically and visibly construct a powerful credit history which tells each subsequent creditor that this is a dependable financial borrower.
• Strategy: Stress the need to never miss a payment. You should consider setting up automatic payments or reminders to help keep you on track after paying off your mortgage and maintaining a healthy credit score.

The Importance of Credit Mix

• What it is: Your credit mix indicates the different types of credit you have (revolving accounts such as a credit card and instalment loans like a mortgage or car loan).
• Impact: A large, long-term instalment loan, like a mortgage, on your credit file can improve the score impact of your mix of credit types on your score¹ (typically 10% of the overall rating).

The Role of Credit Utilization

• What it is: The ratio of your card balances to your credit limits.
• Effect of Mortgage: The mortgage is a loan (not revolving credit) and thus does not directly affect your credit utilization after purchasing a home. But holding a mortgage generally makes people less dependent on large amounts of credit card debt, which might increase their utilization ratio and raise the score.

What Happens if I Pay Late or Miss a Payment

• Impact: One late payment on a mortgage can cause your credit score to fall significantly and stay on your record for an extended period. Having several late payments on your credit report can cause enormous damage to your credit score.
• Strategy: Advise a proactive approach. If you expect a problem making payments, contact your lender right away to discuss options such as forbearance or adjusted payment plans.

3. Beyond Home Ownership: The Lasting Impact of Paying Off a Mortgage

The Big Payoff & Credit Report Update

• What it is: Pay off your mortgage. The moment when you write the last cheque to pay off your home loan, the lender will report that’s been paid off in full to credit bureaus.
• Impact: This is a good thing, and it represents that you fulfilled the terms of an important financial arrangement. At first, you may notice a slight drop in your score when the “paid-off mortgage” account is closed – as it shortens your average age of accounts. But the enduring good of a paid-off loan is formidable.

The Long-Term Benefit

• What it’s about: The closed and paid-in-full mortgage will still be visible on your credit report for years (and potentially up to 10 or longer depending on where you live).
• Impact: It becomes a historical record, as well as one that you actually completed paying off — which will continue to have positive effects on your score months after it’s been paid. It’s one of the financial perks of buying versus renting.

Conclusion

Put succinctly, the credit implications of home ownership run in stages: a small initial dip from the application for financing; years and decades of so-so-to-very-positive credit building through prompt payments on that mortgage loan while it’s outstanding to you; and then finally an enduring positive record after payoff.

You can purchase a home and get there sooner thanks to one of the most impactful ways you can build excellent credit: having an instalment loan, such as a mortgage. By being disciplined and consistent about it, the homeowners are not only ensuring that they have a roof over their heads but also building solid grounding for their financial goals.

Call to Action

Start your credit-building journey today! If you are thinking about applying for a loan, give consideration to checking your credit report and knowing more information on how this complex system works that we all love called “credit”.

Frequently Asked Questions