Mortgages: How does a mortgage affect your credit score?

Your credit rating can be a determining factor in whether or not you are approved for a mortgage. Few people can afford tobuy a property entirely with cash, so your credit score will help the lender determine the risk you represent as a potential customer. However, it’s not just the credit score you have before you take out a mortgage that matters. The mortgage itself can have a significant impact on your credit rating. Assuming you make all your payments on time, as agreed to in the terms of your mortgage, your mortgage is likely to give your credit rating a big boost.

Credit history improvement

Credit history is one of the most important determinants of your credit rating and viability as a lender. Nothing has more impact on your credit rating than the history of payments you’ve made against borrowed money. Your typical mortgage will likely have an amortization period of 15 to 30 years, which means you will have to make many credit-related payments during that time. If all your payments are made on time during this period, it can really improve your credit score. Another factor is the age of your credit. It will help if you show that you can pay your mortgage consistently over a long period of time. It should be noted, however, that missed payments can hurt your credit score, even if it’s just one missed payment. One missed payment can ruin the benefits of 30 years of regular payments you have made.

Diversified credit

Another factor in your credit score is the number of different types of credit you’ve had over the course of your credit history. There are many different credit applications you can make, from credit cards, to auto loans, to mortgages, etc. Having a wide variety of these types of loans can improve your credit score. However, even with the most diverse credit history possible, you can’t make up for a history of missed payments. These types of loans are considered different types of credit, from the credit card which is a revolving credit loan, and the mortgage which is an installment loan. Having these different types of loans shows the diversity of credit repayment regardless of the configuration.

The difference between a mortgage and rent

The main difference between a mortgage and rent when it comes to your credit score is that rent payments are not a form of credit. In this case, the owner of the property does not lend you anything on which you make repayments. Renting is essentially a service at its core. You pay someone for the service of living on their property. A mortgage, on the other hand, involves receiving a lump sum of money to invest in a property that you will purchase, and then paying off that loan, thereby improving your credit rating (assuming payments are made on time). Rents can be factored into a credit scoring model, but must be reported through rental reporting services. However, it’s not that common, and unlike a mortgage that will automatically be reported to the credit bureaus, incorporating rental history into your credit score is not a simple process.

Negative impact of a mortgage

As we’ve seen, a mortgage will help you build credit over time if you make your payments on time. However, taking out a mortgage can also lower your credit rating at the beginning. When you decide to apply for your mortgage, the lender you choose will perform a credit check to read your dossier de crédit and determine if you can be approved. The credit report will trigger what is called a “credit impact inquiry”. Running this report can temporarily lower your credit score by a few points. It is important not to apply for too much credit in a short period of time, as all lenders will be looking at this report and it could negatively impact your credit history. However, FICO, which produces the credit scores, has a system in place that does not take into account multiple applications within a 45-day period, so multiple mortgage applications should not have a significant impact on your credit score. The standard approach to these credit reports is for the lender to take reports from the three major credit bureaus. They will then take the average of the three scores or choose the median score to determine whether or not they will accept you and what rate they will offer you. If you choose to view your dossier de crédit (which is free), you will be able to see the history of inquiries made by lenders over time. The bottom line is that taking out a mortgage with your lender can have a temporary negative impact on your credit score until you can prove your ability to repay the loan. To consistently improve your credit rating, you must make regular and timely payments throughout the life of your mortgage. In addition, your mortgage will contribute to your credit rating by improving the composition of the various debts you have incurred. As long as you make your mortgage payments on time, you will reap the benefits of a mortgage in the eyes of the credit bureaus. If you miss a payment, there are credit repair companies that can advise you on the best course of action.

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Jean-Maximilien is an expert in Canada and France about Loyalty programs, Credit cards and Travel. He is the Founding President of Milesopedia.

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