How Does a Mortgage Affect Your Credit Score?
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When it comes time to buy a house, few people can afford to pay entirely in cash.
Most opt for a mortgage, or a home loan. Like all major lines of credit, a mortgage will appear on your credit report. This is probably a good thing: A mortgage can help build your credit in the long run, provided you pay as agreed. Here’s why.
A mortgage adds to your credit history
Nothing affects credit score more than your payment history.
Mortgages typically require 15 to 30 years of payments, which is plenty of time to polish your score by making on-time payments. It can also eventually contribute to the age of your credit, or how long you’ve had credit, which may help.
On the other hand, if you miss payments, expect a drop in your credit score.
A mortgage diversifies your credit
The kinds of credit you use — credit cards, auto loans, mortgage — also affect your score, but not nearly as much as paying on time. In credit-speak, your credit cards are revolving (reusable) credit, and your mortgage is an installment loan.
In general, the more credit diversity, the better, and a mortgage adds to the mix.
The flip side
Overall, a mortgage should build your credit, but it may cause a decrease at first. When you apply for a mortgage, the lender will check your credit to determine whether to approve you. This triggers a hard credit inquiry, which can temporarily lower your credit score by a few points.
In most cases, the lender will check your credit scores at all three of the major credit bureaus and use the middle score to help determine the mortgage rate you will pay. You can see those inquiries on your credit reports. (You can check your credit report for free, as well as monitor your credit score with NerdWallet.)
If you are shopping for a mortgage, multiple inquiries should not hurt your score. FICO, which produces the credit scores most often used to originate mortgages, counts multiple inquiries within 45 days as a single inquiry.
Mortgage payments vs. rent
Paying a mortgage on time can make a big difference in your credit score — and paying the same amount in rent on time typically does not.
Rent payments are considered in some scoring models if they are reported (and rent reporting services exist to report those payments to credit bureaus).
But mortgage payments are typically reported without any special effort on your part and are routinely factored into credit scores.
