My wife and I bought a house last April, and while we were going through the house-buying process, I was curious about the role my credit score would play in getting the mortgage and how it would be affected once we got the mortgage.
Of course, I know you need a good credit score to be approved for a mortgage, especially in the current economic climate. But I didn’t know if getting a mortgage would have a major impact on my credit score. I was surprised to see that my credit score wasn’t affected very much at all.
How Much Does a Mortgage Affect Your Credit Score?
I’ll show how my credit score was affected once I got the mortgage, and how it looks almost a year later. This is based on my personal experiences, and there are literally hundreds of factors which can go into your credit score, so your mileage may vary.
Before jumping in and showing the actual credit scores before and after our mortgage, I think it’s best to look at some of the factors which explain how it works and what changed in my credit profile. Let’s start by looking at the big picture, then work our way down.
Understanding your credit score
This graphic is from the MyFICO website, and it shows how the factors are weighted for your credit score. So the makeup of your credit score before you apply for your mortgage will help shape how your credit score looks after you get your mortgage.
Tracking my credit score
There are several ways you can track your credit score. Before we got our mortgage I started using a credit monitoring service out of curiosity – mostly I wanted to see how they work and what they track. I signed up and got a copy of my credit scores based on the three major credit bureaus (Equifax, Experian, and TransUnion).
Getting Your Real Credit Score
Many people say that you should get the FICO credit score directly from MyFICO. This seems to be the obvious option since FICO is the company that creates the scores.
However, you can get your score for less by going through FreeScore360. They offer you a seven-day trial and then it is only $19.95 per month going forward, which includes all three of your credit score, credit monitoring, and $1 million of id theft insurance.
Just applying for a mortgage, or any other loan can affect your credit score
Applying for any line of credit, including a credit card, car loan, or mortgage can cause a drop in your credit score. The change in your score depends on many factors, including the type of credit you apply for and how many lines of credit you apply for in a time period.
A typical hard credit pull can lower your score by 2-5 points, which usually isn’t enough to make a major change in your credit score.
How a Mortgage Changed My Credit Score
The following credit scores are mine from various times last year. You can see how applying and being approved for a mortgage changed my credit score. The January credit scores were taken at the request of our landlord to prove we were creditworthy (we had a short-term lease before buying a home).
The April credit scores were taken when we applied for the mortgage, but before the mortgage closed (we closed about 2 weeks later). There were no other credit applications or credit pulls during that time.
The December credit scores reflect our credit score after our mortgage had been active for 8 months, and after I had opened a new line of credit (a credit card with a $25,000 limit <<— no, I didn’t ask for that much, they just gave it to me. I would have been happy with a $5,000 limit!).
Jan 17, 2011 (before applying for a mortgage):
- Equifax – 803
- Experian – 801
- TransUnion – 798
Apr 1, 2011 (immediately after a mortgage approval, but before closing):
- Equifax – 792
- Experian – 777
- TransUnion – 795
Dec 28, 2011 (8 months after the mortgage became active):
- Equifax – 811
- Experian – 796
- TransUnion – 788
What Credit Score do You Need to Refinance a Mortgage?
Whether you are refinancing a VA Loan or a traditional mortgage, one of the most common questions homeowners face when looking to refinance their mortgage is what credit score they need to qualify for a refinance loan. Unfortunately, the answer isn’t as easy as the question. Typically lenders look at several factors before they determine your loan eligibility.
Due to the recession and the problems in the real estate market, many lenders have changed their requirements for refinancing loans. Along with a good credit score, lenders will require that you own a certain amount of equity in your home, you have a manageable level of debt (they will want to examine your debt to income ratio), and strong credit history. Let’s take a look at some of the requirements and what you can do to qualify for a loan.
Good credit score
The minimum qualifying credit score will vary by lender, but you should assume that you will need a credit score in the top ranges to qualify for the best rates. Your credit score is based on the history found in your credit report.
Thankfully, you can take steps to improve your credit score if your score doesn’t quite qualify for a refinance loan. In fact, it is a good idea to start the process before you apply – it can only improve your odds of approval. Also, keep in mind that being approved for a mortgage can affect your credit score. If you have not applied for a loan yet and are worried about your number, try a MyFICO free trial to get your most current scores and credit information.
Home equity
Home equity is the amount of your home that you have paid for. For example, if you have a home worth $200,000 and you have paid off $40,000 of the mortgage, then you would have 20% home equity. 20% equity also represents the minimum amount of home equity many lenders require when approving a refinance loan.
This isn’t a hard and fast rule, however, and you may be approved for a refinance with less than 20% equity, particularly through some government-sponsored programs that were initiated after the mortgage bubble burst.
Debt to income ratio
Your debt-to-income ratio is important to lenders because it gives them a sense of how much more debt you can handle. Typically, the lower the debt-to-income ratio, the better. Your debt-to-income ratio represents the percentage of the monthly gross income that goes toward paying your fixed expenses such as debts, taxes, fees, and insurance premiums. Again, there is no hard and fast rule for debt to income ratio, and the required number can vary by lender.
Credit history
Your credit history is generally viewed by lenders as a way to gauge future performance. A long and clean credit history is much more favorable than someone with a few marks on their credit report. But don’t let a few bad marks stop you from applying for a refinance loan, particularly if some time has passed since the problems occurred. The more time between your loan application and the bad marks on your history, the better.
What to Do if Your Mortgage Refinance Application is Declined
There are many reasons why a lender might decline your refinance application, and if yours is declined, ask the lender. This information can help you take the necessary steps to increase your credit score, fix your debt-to-income ratio, increase your home equity, or take other necessary steps to improve your chances of approval on your next mortgage application. In addition, a new law will soon require lenders to give you a free credit score when your loan application is declined. This information can be helpful in determining your next steps.
Checking Mortgage Rates
If you are in the market for a new mortgage, these are some of the best lenders available.
Takeaways From Applying for a Mortgage
Multiple credit applications may or may not hurt your credit score
It’s always a good idea to shop around for mortgage rates when you are buying a house, and the credit bureaus realize that people are going to shop around.
So multiple mortgage inquiries in a 45-60 period may only count as one credit inquiry, and shouldn’t affect your credit score too much. But you might see a larger drop in your credit score if you are also applying for credit cards or car loans at the same time. It’s best to secure your mortgage before opening other lines of credit.
Multiple lines of credit in a short time frame may not hurt you.
While you should always secure your mortgage before applying for new credit cards, car loans, or other loans, opening a credit card after your open a mortgage might not hurt you.
In fact, the credit simulator at Credit Karma showed that opening a credit card with a $10,000 line of credit would actually improve my credit score, even though it would decrease my average age of credit and increase my credit limit. This seems to have been the case, as I opened a credit card in early December in my credit score has improved.
Your credit score might go down at first but should rise after a while.
Getting a mortgage will most likely cause your credit score to drop – but that should be a temporary event as long as you make your mortgage and other loan payments on time.
Your score should rise after you make payments on your mortgage for a few months. In some cases, your credit score may end up higher than before you got your mortgage. Again, it all depends on the specific factors affecting your credit score.
You might expect to see something like this:
- Expect your credit score to drop a few points when you apply for your mortgage
- Expect your credit score to drop a little more when your mortgage is approved
- Your credit score will stabilize
- Then your credit score should begin improving, provided you make all loan payments on time (all loan payments including your non-mortgage debt).
Your results may vary. As I mentioned earlier in this article, your results will depend on many factors, such as your credit history, payment history, the total number of lines of credit, the average age of credit, and other factors.
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Monica says
We just purchased a house but still haven’t closed, waiting on the underwriter. My question is our credit scores were high before we got our loan, now we are about 3 weeks from closing and our scores have dropped drastically, would this cause our house not to close even thou we got approved and signed the contract
Ben says
Monica – yes that could effect the final approval of the loan and you should definitely start that conversation with your lending agent as soon as possible. What happened that your credit “dropped drastically?”
The way it works is the lender pulls your credit for pre-approval, this is good for 90 days and the loan offer is based on that, but your credit will be pulled just prior to closing as well to ensure you still qualify for the loan. Until you have your mortgage and close you don’t have a mortgage and general best practice is to treat your credit score as carefully as possible during this time.
youngandthrifty says
Wow, just applying can affect your credit score? I never knew that! Thanks for your helpful tips 🙂
Sun says
I think one should only worry about hard inquiries affecting your credit score, only if the new score would put you in a lower tier increasing your interest rate. I do not know the accuracy of this link, but it illustrates the point:
http://www.bankrate.com/finance/financial-literacy/how-credit-scores-affect-mortgage-rates-1.aspx
Over the life of the mortgage, the small percentages can really add up.
jack foley says
nice timing with your house purchase…
Over here, in Spain housing is depressed, banks are giving 100% finance,
Everything is on the floor…
now is the time to have funds or to have an excellent credit score..