Maxing out credit cards, falling behind on bills, going into foreclosure—these are all known villains that will slay your credit score. But did you know that buying a house will also most likely cause your credit score to drop? That's right; after you've demonstrated utmost financial responsibility by establishing a solid credit score and saving for a down payment, taking out a mortgage will ding your score.
On average, credit scores dip by 15 points after purchasing a home, but they can drop by as much as 40 points, according to a new analysis from online loan marketplace LendingTree. The analysis looked at more than 5,000 consumers who took out a mortgage, examining how it affected their credit scores over the following months.
Some key findings in the study? Scores fall for 160 days (just more than five months) before they bottom out. Then it takes another 161 days for scores to make their ascent and fully rebound, according to LendingTree. So, the credit score decrease after buying a home can affect you for about 11 months total. That's partly because mortgages don't immediately show up on credit reports after you close on your home. There's also a lag time of as much as 60 days before your lender starts reporting your on-time payments.
"You have a new debt that has no payment history and shows that the credit line of the loan is maxed out," explains financial industry expert William Bradley, who has worked for a credit bureau and as a banker.
Let's not let the good news to get lost in the mix, though. Once you establish a history of on-time payments, a mortgage will help your score, Bradley points out. And not just because it will be an account in good standing, but also because a healthy mix of credit counts for 10 percent of your FICO score.
Another reason your credit score drops right after you buy a house? Once your mortgage is added to your credit profile, it lowers the average age of your open accounts. Credit age that makes up 15 percent of your credit score, explains Randall Yates, the founder and CEO of The Lenders Network, an online mortgage marketplace.
In addition to these components, the actual act of shopping for a home can cause a minor drop in your credit score. FICO factors the number of inquiries on your credit report into your score, explains consumer credit expert Michelle Black. Hard inquiries within the past 12 months can lead to a slight credit score drop, she explains. For most people, one additional credit inquiry will take fewer than five points off their FICO scores, according to FICO, the widely used credit-rating model.
So, should you worry about your bruised credit score?
Nah, say the experts.
"The dip in your credit rating is only temporary," Yates says. "A home is the biggest purchase you can make and getting a great rate on a mortgage can save you thousands on interest. Just wait a few months for your credit to recover before applying for a new loan or credit card."
Also, your credit score drop could be more perception than reality if you're one to monitor your credit online with a free credit service, explains mortgage banker David Krichmar. For example, you might see your score as 780 on a free website, which tend to inflate scores, but the score pulled by your lender is actually 740.
"This doesn't mean that the score fell 40 points," says Krichmar. "It is two different scoring models and will always differ."
Finally, a good tip if you want your score to rebound quickly: Don't apply for any new credit right away and keep all credit card balances under 30 percent of the high credit limit, Kirchmar suggests.