The different ways a mortgage affects your credit

Category: Loans

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You’ve just been pre-approved for a mortgage and you’re one step closer to being a homeowner—congratulations! While it’s certainly an exciting time, it’s also good to be prepared for what happens once you have your mortgage and begin to make payments. Your credit was likely good in order to obtain the home loan to begin with, but what happens after? Your credit score is affected after you get a mortgage in some of the following ways:

Your credit profile is more diversified

Different types of loans and credit is good for your credit score overall. For example, if the only type of active loan accounts you had prior to your mortgage was just credit cards, you’ve now added something new to the mix. By having different types of credit, you’ll eventually see an increase in your credit score.

Your score will go down initially

Although having a mortgage can eventually help to improve your credit score, it will take a hit in the beginning. A mortgage is a significant loan, and is usually the largest amount of money that someone will borrow in their lifetime, and as such, your credit score goes down a bit in the beginning. Once you begin making timely payments, however, you’ll slowly see your credit score return to normal. Eventually, you should even see your credit score go up, assuming you’re timely with other loan and credit payments. But because of the initial hit that your credit score takes, you may find that it’s difficult to qualify for other loans or lines of credit. You may have to wait at least six months before you’re eligible for another large loan.

Timely payments will help your score

After a while of making timely mortgage payments, your credit score will likely go up. Because you are borrowing such a large amount of money, making timely payments will help to improve your score in ways that payments for small accounts (such as low-limit credit cards) cannot.

Debt-to-income ratio and loan balances

The balance of your mortgage positively affects your credit as the loan decreases. Your credit score improves as the gap between your current balance and initial loan diminishes. Your debt-to-income ratio compares all your loans, credit card balances, and overall debts to your total income. A low debt-to-income ratio shows creditors you will be more likely to repay the balance borrowed, and as such, is preferred by lenders. A high debt-to-income ratio, on the other hand, could result in being denied credit. When you take out a mortgage, your debt-to-income ratio will change drastically because you are borrowing such a large amount of money. If you have other debts and have taken out other large loans that you still have high balances on, it can negatively affect your credit score.

Are you receiving long-term payments from an annuity or structured settlement, but could use some extra cash to take care of bills and expenses? Peachtree Financial Solutions may be able to help get you the money you need. By purchasing some or all of your future payments, we can send you money sooner in the form of a lump sum. To learn more about selling future payments for a lump sum of cash and to receive your free quote, contact Peachtree Financial Solutions today.

Nothing above is meant to provide financial, legal, or tax advice. You should meet with appropriate professionals for such services.

Tags: Buying a Home, credit, Credit Score, mortgages

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