How Does Buying a Home Affect Your Credit Score

Buying a home and becoming a homeowner can impact your credit score. In the long run, the impact should be positive, so long as you make timely, full payments. Let’s go over the effects on your score through each stage of the process, beginning with mortgage pre-approval.

Mortgage Pre-Approval

When you apply for mortgage pre-approval, the lender usually either performs a soft inquiry, or estimates your credit score. A soft inquiry will not damage your credit score. So, you can take this step without any apprehension.

You’ll receive a pre-approval letter that tells you how much the lender is likely to approve you to borrow. This helps you know how much home you can afford. You can show the letter to sellers so they know you are a serious buyer.

During the Application Process

Once you proceed to actually applying for a mortgage, the lender will need to perform a hard credit check. This shows up in your credit report under “inquiries,” resulting in a temporary minor decrease in your score.

This might leave you to wonder whether it is still okay to shop around for a mortgage. The answer is “yes.”

So long as lenders make multiple inquiries within a period of 14 to 45 days, they may be combined in the calculations as if they were just one inquiry. Keep in mind that different scoring models have different timeframes. So, sometimes one lender might see a single inquiry, whereas another might see multiple inquiries for the same time period.

While You are a Homeowner

Let’s say you successfully apply for a mortgage, and buy a home. You close, receive your keys, and are now a homeowner. How will owning your own home affect your credit score?

Your Mortgage

Having a mortgage should have a positive effect on your long term credit score, assuming you keep up with your mortgage payments. Making full payments on time every time will help you raise or maintain your score.

If you fall behind on your payments, on the other hand, that will negatively impact your score. But that hopefully will not be an issue if you have planned well and bought a home you can afford.

Taking out a mortgage increases your credit diversity by adding another type of loan. Credit diversity has a positive impact on your score, so this is another way that having a mortgage can help you maintain a healthy credit score.

Since a mortgage is a long term loan, it can also improve the length of your credit history after enough time. This factor raises your score as well.

Utilities

Traditionally, utilities payments do not contribute to your credit score. But there is a program called Experian Boost that you can apply for if you want to voluntarily have certain utilities payments reported to the credit bureaus.

Examples include internet, phone services, water, power, trash, and so on. You can even have streaming services reported.

Being able to build credit this way is not exclusive to homeowners; renters can do it too. But as a homeowner, you have additional utilities that can be reported (i.e. water and trash, which renters may not pay for directly).

Note that if you fall behind on your utilities, that can have an adverse impact on your credit score.

Financing Repairs and Upgrades

You may need to make major repairs to your home at some point, or you might decide to install upgrades such as solar panels, energy-efficient doors and windows, or an addition.

To pay for these repairs or upgrades, you will probably take out a loan, perhaps a home equity loan or HELOC.

When you submit your initial application for financing, your credit will take a temporary hit, because it will be a hard credit pull.

If you are approved, however, you will receive the funds, and then need to make payments on the loan.

As with your mortgage, if you pay in full and on time each month, that will reflect well on your credit score. If you fall behind, however, your credit score will drop.

The Bottom Line

All told, becoming a homeowner gives you opportunities to increase your credit score. In order to do that effectively though, you need to carefully budget your finances. Buy a home you can afford, shop around for affordable utilities when you can, and be mindful with your budget for repairs and upgrades. Always make sure that you are paying all of your bills on time.

If you need to raise your credit score before you apply for a mortgage, we can offer you personalized suggestions during your consultation. We can also connect you with home loans that do not require perfect credit.

Buy a Home in Washington State or Colorado

Blue Square Mortgage is based in Seattle, and can help you buy a home anywhere in WA or CO. Even if you do not have a perfect credit score, we can connect you with a suitable home loan. To begin, please give us a call at (206) 352-6453 to schedule your mortgage consultation.