How Buying a Home Affects Your Credit Score

If you've never thought about your credit score in the past, then start now. This one number doesn't just strongly influence credit cards and loans; it also determines whether or not you will be forced to pay things like utility deposits and insurance coverage. Although some home shoppers might not know it, the home purchasing process will often cause serious fluctuations in their score in both the short and long term. Keep reading to learn about the changes you should expect to see as you go through the steps of applying for a mortgage, purchasing a home, and making payments.

Mortgage Applications Cause Small Reductions

As you begin the home buying process by applying for a mortgage, don't be alarmed if you see small reductions to your credit score. It is perfectly normal for your score to sink slightly because, as part of the approval process, lenders perform what is called a "hard pull" of your credit score. Hard pulls alert credit score monitoring companies that you are actively applying for new sources of credit, and typically result in about a 5 point hit to your score. If there's such a thing as a hard pull, is there also a soft pull? The answer is yes, and they almost certainly happen to you on a regular basis! Unlike hard pulls, soft pulls occur involuntarily when companies check your credit for things such as pre-approved credit cards offers. Read more about the difference between hard and soft pulls in this article.

Right now, you might be thinking "who cares about 5 points?" While it may not seem like a lot, even a 5 point drop can cause you to fall outside of your current credit rating bracket, reducing your chances for the best interest rates. In order to minimize this risk, do all of your mortgage applying within as small a time frame as possible. Credit-calculating algorithms are generally smart enough to recognize multiple mortgage applications occurring around the same time as a single loan application.

Short Term Pain and Long Term Gain

After the minor reductions to your score from mortgage applications, you should be prepared for another decrease once you've actually obtained the loan. This occurs because of the large, sudden increase in the amount of debt associated with your credit report, and usually affects first-time buyers the hardest due to their more limited history.

Luckily, this should be the last of the bad news. In fact, adding a mortgage to your credit history should result in long-term increases to your credit score for two main reasons. First, about 10% of your total credit score is determined based on the mix of credit you have on record. By diversifying your debt with a mortgage, your score should bounce back fairly quickly from short-term losses. Second, making your regular mortgage payments on time will rapidly increase your score due to their size. As long as there are no issues with repayment, your score should be higher than it started after only a few months!

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