How much does a mortgage application affect credit score?
A mortgage is the largest debt you’ll have on your credit report at any given time. How you manage, it will have a significant impact on your credit rating.
You might not realise that this impact doesn’t start at the point you secure the mortgage but at the point of application. This is why it is important to get help from an expert mortgage broker before applying for a loan to minimise its impact.
How does a mortgage affect your credit score? Does it hurt or help your credit rating? What is the effect of soft vs hard mortgage credit checks? This guide explores the answers to these questions on credit scores, mortgages and more. Read on.
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How does a mortgage affect your credit score?
If you’ve taken out a mortgage, congratulations! That’s a huge milestone – not just for you but for your credit. Whether you had good credit or bad credit, to begin with, the fact that you were able to secure a mortgage at all is a major accomplishment. Believe it or not, that’s the easy part. The real task is to ensure you responsibly manage your mortgage by repaying your instalments on time.
When you first apply for a mortgage, you’ll notice a minor dip in your credit score (usually five points or less). This shouldn’t alarm you since this drop is just temporary and isn’t significant enough to alter a lender’s decision on whether or not to approve your mortgage application.
Moreover, the rating models that credit reference agencies, or credit bureaus as they are sometimes called, use recognise that comparing rates from different providers is a good financial move. These models consolidate multiple credit inquiries within a limited timeframe into a single event. You don’t have to worry about it hurting your credit score as long as you make every mortgage payment on time.
As a side note, put off the student loan refinancing and credit card applications when applying for a mortgage until you have secured the loan and closed on your new home. This isn’t the time to apply for credit facilities that wouldn’t be deemed urgent. Taking out different forms of debt within a limited timeframe doesn’t augur well for your credit profile and will, no doubt, hurt your credit score.
When you finally get your mortgage application approved and a new mortgage account is opened in your credit file, your initial credit score will dip slightly. This is because all that credit reference agencies see is a massive, brand-new debt on your credit file with no accompanying payment history to go with it.
The score dips because they cannot tell whether you can manage it responsibly by keeping up with your repayments. Your credit score also decreases because the new mortgage account decreases the average age of all your accounts, a metric that also factors into your credit score.
When you take out a mortgage, the initial dip in your rating should resolve in a couple of months.
As long as you keep up with the required mortgage payments, remit them on time, and keep all other factors in your credit report constant, your rating will eventually return to where it was.
How does a mortgage hurt your credit score?
At the risk of stating the obvious, late or missed mortgage repayments will be reflected in your credit score. If you’re new to the mortgage world, here’s a free piece of advice: Always make your mortgage payments before or on the due date, never after.
In the grand scheme of things, being a day or two late won’t make much difference to your credit score. Most mortgage lenders have a 15-day grace period before they impose late fees to penalise borrowers who’ve still not made their mortgage repayment. The real trouble starts when you’re 30 days past due. At that point, mortgage lenders report the account as late to the credit agencies.
Keep in mind that your payment history accounts for more than 35% of your credit score. Even a single past-due payment report on your record can affect your overall credit rating.
Remember, as well, that a late payment issue will appear in your credit report for six years. As long as you keep up with your repayments, its overall effect should diminish as the years go by. It is also worth noting that an isolated 30-days-past-due report isn’t as damaging as multiple late payments, extending 60-90 days.
Foreclosure
Part of your mortgage agreement states that the mortgage lender has the legal right to repossess your property and sell it to recover their funds if the loan goes into foreclosure. Foreclosure is the next course of action when a loan goes into default. This results from successive missed payments (usually 120 days).
Loan default is seriously damaging to your credit. A foreclosure is even more severe and can render a devastating blow to your credit rating.
If you cannot make a payment, get in touch with your mortgage lender as soon as possible and discuss your options. That way, you can minimise the potential impact missed repayments could have on your credit score.
How does a mortgage help your credit score?
The early dip in your credit score when you first get a mortgage is expected. It’s a minor bump in the road. Barring multiple missed payments, the potential upside of a property loan on your credit score outweighs the drawbacks, and it all has to do with your FICO score to show you are a responsible borrower.
FICO, short for Fair Isaac Corporation, is a specific scoring system lenders use when deciding whether or not to extend credit based on the risk that prospective borrowers pose to them.
When assessing a borrower’s creditworthiness, FICO uses five key metrics (ranked from most to least influential). A mortgage fits into each of them to boost your overall credit rating. Here’s how:
- Payment history: Accounts for 35% of an individual’s credit score. It looks at whether a borrower pays their outstanding accounts on time. Your run-of-the-mill mortgage runs for 30 years on average. That’s 30 years’ worth of credit-enhancing, on-time repayments.
- Amounts owed: Accounts for 30% of an individual’s credit score. It looks at a borrower’s overall debt burden. A mortgage’s sheer size can improve your credit score if you keep up with the payments and remit them on time.
- Credit history: Accounts for 15% of an individual’s credit score. It looks at the length of time a borrower has had credit. The longer, the better. Your mortgage transitions into a long-term account as the years go by, which, in turn, boosts your credit.
- Credit mix: Accounts for 10% of an individual’s credit score. It looks at various credit accounts, such as instalment loans, auto loans, mortgages, credit cards, and retail accounts. Having a healthy mix of multiple accounts shows your ability to manage different types of credit responsibly.
- New credit: Accounts for 10% of an individual’s credit score. It looks at the number of opened accounts within a specific timeframe. Too many opened accounts within a relatively short period of time indicate risk and lower your credit score.
How do credit checks affect your credit score?
When assessing your loan application, lenders can perform two types of credit checks:
- Soft search: Does not leave any footprint in the borrower’s file.
- Hard search: Records the search in the borrower’s file.
Remember that when applying for a mortgage, the lender always performs a search as part of their due diligence process. Ensure that you find out beforehand what kind of search they intend to do and at what stage of the application process.
You should only consent to a hard search when you’re confident that you’re applying to the right lender that’s likely to approve your application. Here’s why.
Every time a mortgage provider runs a hard search and then rejects your mortgage application, the footprint they leave in your credit file will be visible to other prospective lenders. It tells them that you’re having a hard time getting approved for a loan or applying for multiple mortgages with several lenders.
Either way, it signals to them that you’re a risky applicant, and credit reference agencies also pick up on that fact. Your credit score drops as a result.
Mortgage-related hard searches stay in your file for 12 months. Potential lenders can see these searches whenever they view your file.
Optimise your credit with expert help
The best way to protect your credit score is by working with an expert broker with insider knowledge of the mortgage market. They are best placed to ensure that you apply for a property loan with a lender that is likely to approve your application and give you competitive rates, especially if you have bad credit.
FAQs
Why did my credit score drop when I got a mortgage?
An initial dip in your credit score when you get a new mortgage is normal. It occurs because you’ve taken on a massive amount of new debt, and the credit reference agency’s scoring system doesn’t have any payment history to determine whether you’ll manage the debt responsibly.
Will an application for a mortgage affect your credit score?
It depends on whether the lender runs a soft or hard search as part of their due diligence process. Soft credit checks don’t leave any footprint in the borrower’s file, whereas hard credit checks do.
If multiple lenders run a hard search and reject your application, these searches will stay in your file for 12 months.
It signals to other lenders and credit reference agencies that you’re having difficulty securing a mortgage or trying to apply for multiple loans within a short period. Either way, lenders view you as a risk which, in turn, hurts your credit score.
Can I get a mortgage with no credit history at all?
Yes, if you have no credit history there are some lenders that specialise in no credit history mortgages however you will need to prove excellent financial backup to get passed for these types of mortgages.
What happens to my credit score if I miss a payment?
Missing a payment by a few days won’t affect your credit score, although you should aim to make your mortgage repayments before or on the due date.
On the other hand, if you’re 30 days past due, the lender will forward this information to credit reference agencies and report the account as late. This will knock some points off your credit score.
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