When You Apply for a Mortgage

When you want to buy a house, the first step is to get prequalified for a mortgage. It’s a helpful step for everyone because it ensures you’re shopping within your budget. During this process, lenders will typically check your credit using a soft inquiry, which doesn’t hurt your credit score. However, some may process a hard inquiry. Once you’ve found a house and need to finalize the mortgage, your lender will need to process a hard inquiry on your credit report, which will affect your credit score. How many points does a mortgage inquiry affect credit score? It’s usually five or less. If you’re going to shop around for the best mortgage rate, which is a good idea, try to lump your applications together within a small window of time. When you do so, all the inquiries count as one, minimizing the negative impact on your credit score. The credit scoring bureaus can vary in their allowable time frame, but typically, it’s 14-45 days.

Once Your Mortgage Is Finalized

Once your mortgage is finalized, you’re officially a new homeowner. What does that mean for your credit score? In the beginning, your credit score will likely drop because credit scoring models don’t yet have any proof that you’ll successfully make the payments. Another drop can occur due to the new account causing your average account age to decrease. On the other hand, if you don’t have any installment loans yet, a mortgage can improve your score by diversifying your credit mix.

As You Pay Down Your Mortgage

In the long run, having a mortgage and paying it off as agreed can help you build a stronger credit profile. A study by LendingTree found that U.S. borrowers saw an average credit score drop of 20.4 points after getting a mortgage. It took an average of 165 days after closing for credit scores to reach their low points, and another 174 to rebound. In total, the decline and rebound averaged 339 days—just shy of a year. While your score will likely drop initially, a track record of on-time monthly payments on the sizable loan will help to improve your score and trustworthiness as a borrower.

If You Miss Payments or Foreclose

What if you miss a mortgage payment? Your payment history is the most influential factor on your credit score, carrying a 35% weight. If your payment is 30 days or more past due, it will typically be reported by your lender to the credit bureaus. If your mortgage goes into foreclosure due to multiple missed payments, the lender will report it to the credit bureaus. The missed payments and foreclosure will all be negative items on your credit report, which will cause a severe drop in your score. These negative marks will remain on your report and impact your score for seven years.

How Does Refinancing Affect Your Credit Score?

If you decide to refinance your mortgage, expect some changes to your credit. Similar to getting a mortgage, refinancing requires shopping around and letting lenders check your credit. This process can cause a small dip in your credit score. Once you find the right loan, your old loan will be paid off and closed, and a new one will begin. The closing of your existing loan could lower your score if it’s your oldest account because the overall length of your credit lines is a factor. Similar to getting a mortgage, as long as you keep up with your payments, your score will rebound in time.

When You Pay Off Your Mortgage

When you make your final mortgage payment and own your home free and clear, what will happen to your credit? The loan will be marked “closed in good standing” on your credit report for 10 years. As for your credit score, don’t expect any dramatic change. Closing a mortgage has very little impact on your credit score, unlike closing a revolving credit card, which can hurt your score by reducing your available credit. However, you may see a drop if the mortgage was your only installment loan, as it will impact your credit mix.

The Bottom Line

Getting a mortgage is a necessary step for most homeowners, but no one wants to see their hard-earned credit score drop. While your score will likely decline during the mortgage application and finalization process, it should rebound within a year as long as you maintain on-time payments.