For many Waterloo Region homebuyers, especially first-timers, long before they can actually get a mortgage and close a deal on the perfect home some time has to be spent building up a credit rating that will not only qualify them for a home loan in the first place but also help them get the best possible terms and interest rates on such a loan.
Once they have achieved a good credit status though many do wonder – and worry – exactly what buying the house will do to their newly positive credit reputation.
Buying a home will indeed have an effect on your credit rating and, in some ways, that effect, at least temporarily, will be a negative one. Here is a short explanation about why that will happen and how long these changes will last.
Shopping for a Mortgage
The savvy homebuyer does usually take some time to shop around for the best possible mortgage, and that will likely mean submitting several different applications.
Each lender applied to will then run a check on the applicant’s credit. Known formally as a hard credit inquiry, each one of these will temporarily knock a point or two off your credit score.
You can minimize the impact of this drop, however. Once you are ready to shop for a mortgage try to ensure that all credit inquiries will be made in the same 30-day period.
That is because if that is the case then you will only be penalized once. Some lenders do now also perform what is known as a ‘soft’ inquiry initially, which does not affect your credit score, so you may want to ask what kind of check a lender performs. Otherwise, you may find that a number of credit inquiries spread out over a couple of months will have a noticeable negative effect.
You will also often find that working with a mortgage broker helps as they will be able to help you avoid ‘overshopping’ for a mortgage, thus decreasing the number of hits on your credit.
After You Sign the Loan Documents
Not too long after you sign your mortgage documents your new loan will be reported to the credit bureaus. The amount of total debt a person carries is a significant factor in determining their credit score and as a mortgage is a significant debt then yes, initially it will have a negative impact on your credit.
On the upside, a mortgage is considered to be an installment debt (car and student loans are two other examples of installment debt) which is more favorably regarded than a revolving debt like a credit card.
Make on-time payments for three to six months though and our credit rating will go right back up and will probably even improve.
Why Your Score Will Eventually Improve
As long as you make your monthly mortgage payment on time as the months go on your credit will build up steadily as you continue to prove to potential lenders that you are indeed a responsible credit risk. This is an excellent reason to set up a standing bank draft to autopay your home loan every month, so that you can ensure that forgetting to look at the calendar, or a slow postal service, does not affect your good ‘credit name’.