The effect of a mortgage on credit

March 17, 2006 11:49 AM

What is the effect of a mortgage on a credit score?

If there is an immediate effect, will the rating go up or down? ( I don't mean the pulling of the credit score for an application - I mean actually signing on to one.)

posted by plexi to work & money (15 comments total)

I can't speak to the immediate effect, but the slightly delayed one is that in about 60-90 days after signing a mortgage, you'll get credit card and loan applications pretty much every single day. I have to presume that having a mortgage makes you look like a fairly reasonable risk to the creditors.
posted by kimota at 12:29 PM on March 17, 2006

"applications" = "offers, in the mail" if that's not clear.
posted by kimota at 12:29 PM on March 17, 2006

It depends a lot upon your current score and the factors that determine it. The most important factors, after how you pay your bills, in determining your credit score are the amount of money you owe and your amount of available credit. Upon signing a mortgage the amount of money you owe goes up significantly. The non-credit debt portion (e.g. loans, mortgages) does not affect your score nearly as much as having a huge credit limit and regularly being at or near your max.
posted by pmbuko at 12:32 PM on March 17, 2006

Your score will nominally improve if you get a mortagage and make timely payments, but a lender's interpretation of your credit history will change significantly, in both positive and negative ways. "You're paying off a mortgage. Great, you're becoming a stable, established person. However, you're paying off a mortgage, so a large chunk of your income is now being devoted solely to that specific debt."
posted by frogan at 12:34 PM on March 17, 2006

Ours dipped quite a bit, because suddenly our debt ratio (the amount of credit we were using, compared to the amount we could get) was much higher. We were told this would even out over time, and our score is crawling back upwards.

If you are filthy rich, and buying a house is no big deal, then it probably won't affect your score. But if you're like most of us, you may take a hit.

And yeah, you'll get credit card offers out the wazoo, but that seems to be done on different logic.
posted by frykitty at 12:34 PM on March 17, 2006

Payment history makes up a very large portion of one's credit score. While the immediate effect of taking on a mortgage causes the amount you owe to go dramatically, if you pay "as agreed" on your mortgage without neglecting any other debts it will go a long way to help raise/maintain a high credit score.
posted by HoldFast at 12:35 PM on March 17, 2006

Within a year of getting a mortgage, my and my husband's credit scores went up ~100 points each.

So for us, it was good. I didn't look at my credit directly AFTER the purchase, though.
posted by Medieval Maven at 1:01 PM on March 17, 2006

What pmbuko said - it depends. Both wife and I had pretty darn high scores before (student loans paid, car loans paid, department store/credit card accounts timely) so the net effect was slight.
posted by fixedgear at 1:10 PM on March 17, 2006

The only two factors that should really have any effect would be: a) how much credit do you have tied up? mortgage, loans, credit cards etc.

And b) paying your credit bills before a 30 day lapse.

Not paying within 30 days will immediately screw your score.

But also having credit cards that you don't use will too. Basic debt to income ratio stuff.

You might be thinking about how, once you have some equity in your property, your ability to get loans increases greatly. But that is becasue of your earned equity, not so much your credit rating.
posted by snsranch at 3:59 PM on March 17, 2006

frogan writes "However, you're paying off a mortgage, so a large chunk of your income is now being devoted solely to that specific debt.'"

The other way to spin this is that you would've been making rent payments otherwise, so the actually effect on income may be neglible (unless your new mortgage payment is significantly larger, after-tax, than your old monthly rent). And you can borrow against the equity in the house, which gives additional financial flexibility.

But why is plexi concerned about the new credit score? If s/he wants to get additional credit cards, it sounds like the mortgage will help. If you want to buy a second house or a new car, it probably hurts because the lender will look beyond the FICO score.
posted by mullacc at 5:51 PM on March 17, 2006

Like frykitty said, my credit score took about a 60 point plunge after my loan went through. However, after about 6 months, it was higher than it had been previous to having a mortgage.
posted by bwilms at 6:15 PM on March 17, 2006

at the risk of derailing, i'd like to ask how everybody in this thread knows exactly what their credit score is? I don't live in the US, and while i'm aware that my credit history has been assessed by banks when i've applied for loans/credit cards, i've never actually seen a score as such.
posted by nml at 10:39 PM on March 17, 2006

um, I do not believe that a home mortgage affects your credit to debit ratio.

i have a mortgage of several hundred thousand dollars, of which I still owe, well, several hundred thousand dollars. that should be a significant debt in my credit-to-debt ratio. however, i have a very good credit score.

and yet, if i put say 2000-3000 bucks on one of my credit cards for a vacation or something and don't pay it off that month, I'll see my credit score dip the following month because my credit-to-debt ratio has changed negatively. after i get that 2000-3000 paid off, my score climbs back up.

and, obviously, 2000-3000 is a tiny fraction (less than 1%) of what i owe on my mortgage

thus, if home mortgages affected cerdit-to-debt ratio, I shouldn't have a very good credit score.

now, this is not to say that other things relating to your mortgage do not affect your credit score, such as delinquency, late payments, etc. I just think credit-to-debt ratio isn't included.
posted by poppo at 9:03 AM on March 18, 2006

nml - we've recently had some new rules come into effect (well, probably a year ago by now) that state that each of us is entitled to a free copy of our credit report from each credit bureau per year. So, probably a lot of us do know exactly (or very close to exactly) what our credit score is (at least the raw score).
posted by Medieval Maven at 7:11 PM on March 19, 2006

nml: I subscribe to equifax's credit monitoring service. Initially I bought it to protect my credit, but it's also helped me build a better score.
posted by frykitty at 9:35 AM on March 20, 2006