A house is the biggest purchase most people make in their lifetime, with the accompanying mortgage being their largest financial transaction. Most people know that they should work toward having the best possible credit score before applying for a mortgage, as an applicant’s credit score can significantly affect the mortgage’s amount and borrowing cost.
But what happens to your credit score after you get a mortgage?
A new analysis looked at more than 5,000 consumers who took out a mortgage and how their credit scores changed in the months following.
Our study shows that scores initially fall, but eventually recover.
Key Findings
- Scores fall for at least 4 months. On average, credit scores fell by 15 points and took 160 days (just over five months) to reach their low points. Mortgages do not appear on credit reports immediately after closing. Typically, the mortgage lender starts reporting to the credit bureaus after your first payment (depending on the lender’s reporting cycle). Therefore, it may take about 60 days after closing (or even longer) for it show up and start affecting a score. New Orleans homeowners, for example, saw their credit scores reach their lowest points in an average time of 133 days, while Milwaukee home buyers’ scores had the longest decline: 191 days.
- Recovery takes at least another 5 months. It took an average of 161 additional days for scores to return to their prior levels. As borrowers make payments on time, their credit scores start to recover. In Richmond, Virginia, buyers’ credit scores rebounded fastest at 130 days, while the upward climb for homeowners in Austin, Texas lasted 197 days.
- 11 months later, scores recover and are poised to move higher. The national average for the complete decline and recovery cycle was 11 months. Richmond home buyers saw their credit scores go through the cycle the fastest (nine months) while the dip and return of Milwaukee buyers’ scores took the longest (13 months).
- Tight range of score declines. The average score fell the most in Virginia Beach, Virginia (down 20 points), and the least in Minneapolis at just 11 points. Individual credit scores in the sample declined by as much as 40 points.
Why new mortgages affect credit scores
When a consumer takes out a mortgage, a large balance is added to his credit report. Credit scoring models consider a consumer’s total balance of money owed, and a large increase in outstanding debt drives scores lower. The presence of a new credit line item also weighs on the score, though to a lower extent.
As time passes, making on-time payments helps a borrower improve their credit score as they demonstrate that they are managing their new mortgage account well. Having a mortgage also increases the diversity of accounts in the credit file, which also boosts the score. Eventually, the score returns to its pre-mortgage level and, in most cases, surpasses it.
As well as national data, we took a look at the variation in credit scores across the 50 largest cities in the U.S. These aggregate numbers give an excellent view of the effects buying a home can have on credit scores. We used data from My LendingTree.
Cities with the fastest credit score recovery after getting a mortgage
1. Richmond, Virginia
- Average initial credit score: 693
- Average decline in score: 13
- Total time until recovery: 266 days
2. Minneapolis
- Average initial credit score: 701
- Average decline in score: 11
- Total time until recovery: 267 days
3. Salt Lake City
- Average initial credit score: 704
- Average decline in score: 15
- Total time until recovery: 272 days
Cities with the slowest credit score recovery after getting a mortgage
48. Riverside, California
- Average initial credit score: 685
- Average decline in score: 17
- Total time until recovery: 375 days
49. Austin
- Average initial credit score: 687
- Average decline in score: 15
- Total time until recovery: 377 days
50. Milwaukee
- Average initial credit score: 700
- Average decline in score: 11
- Total time until recovery: 384 days
50 largest cities ranked by time for credit score to recover
|
Rank |
Metro |
Average Initial Score |
Average Decline in Score |
Average Days in Decline |
Average Days to Recover |
Total Days |
|---|---|---|---|---|---|---|
|
1. |
Richmond, Virginia |
693 |
-13 |
136 |
130 |
266 |
|
2. |
Minneapolis |
701 |
-11 |
136 |
131 |
267 |
|
3. |
Salt Lake City |
704 |
-15 |
139 |
132 |
272 |
|
4. |
Providence, Rhode Island |
691 |
-12 |
139 |
136 |
275 |
|
5. |
New Orleans |
686 |
-13 |
133 |
147 |
280 |
|
6. |
Houston |
688 |
-15 |
147 |
136 |
284 |
|
7. |
Cleveland |
699 |
-13 |
145 |
140 |
285 |
|
8. |
Columbus, Ohio |
697 |
-12 |
142 |
149 |
291 |
|
9. |
Cincinnati |
694 |
-19 |
154 |
141 |
294 |
|
10. |
St. Louis |
711 |
-15 |
143 |
151 |
295 |
|
11. |
Philadelphia |
701 |
-17 |
161 |
136 |
297 |
|
12. |
Detroit |
695 |
-14 |
144 |
153 |
297 |
|
13. |
Miami |
711 |
-16 |
145 |
154 |
300 |
|
14. |
Tampa, Florida |
692 |
-13 |
159 |
145 |
304 |
|
15. |
Oklahoma City |
678 |
-19 |
148 |
156 |
304 |
|
16. |
Birmingham, Alabama |
671 |
-15 |
145 |
160 |
305 |
|
17. |
Buffalo, New York |
705 |
-15 |
165 |
146 |
311 |
|
18. |
Boston |
714 |
-15 |
157 |
155 |
312 |
|
19. |
Portland, Oregon |
704 |
-14 |
158 |
156 |
314 |
|
20. |
Hartford, Connecticut |
695 |
-14 |
166 |
148 |
314 |
|
21. |
Orlando, Florida |
694 |
-13 |
153 |
161 |
314 |
|
22. |
New York City |
710 |
-17 |
156 |
159 |
315 |
|
23. |
Las Vegas |
682 |
-15 |
165 |
153 |
317 |
|
24. |
Denver |
708 |
-17 |
168 |
150 |
318 |
|
25. |
Memphis, Tennessee |
675 |
-13 |
187 |
132 |
319 |
|
26. |
San Jose, California |
725 |
-14 |
149 |
173 |
322 |
|
27. |
Indianapolis |
690 |
-14 |
158 |
164 |
323 |
|
28. |
Atlanta |
684 |
-16 |
158 |
165 |
323 |
|
29. |
Charlotte, North Carolina |
703 |
-14 |
160 |
165 |
325 |
|
30. |
San Antonio |
668 |
-15 |
166 |
161 |
327 |
|
31. |
Kansas City, Missouri |
698 |
-13 |
169 |
159 |
328 |
|
32. |
Washington |
701 |
-14 |
159 |
171 |
330 |
|
33. |
Louisville, Kentucky |
691 |
-14 |
157 |
175 |
332 |
|
34. |
Jacksonville, Florida |
692 |
-15 |
162 |
170 |
332 |
|
35. |
Chicago |
695 |
-18 |
163 |
171 |
335 |
|
36. |
Baltimore |
695 |
-15 |
170 |
167 |
337 |
|
37. |
Pittsburgh |
695 |
-17 |
169 |
169 |
338 |
|
38. |
Nashville, Tennessee |
697 |
-15 |
165 |
181 |
346 |
|
39. |
Los Angeles |
713 |
-15 |
172 |
175 |
347 |
|
40. |
San Diego |
710 |
-14 |
175 |
173 |
348 |
|
41. |
Phoenix |
686 |
-16 |
175 |
175 |
350 |
|
42. |
Seattle |
708 |
-15 |
174 |
178 |
351 |
|
43. |
Dallas |
690 |
-13 |
173 |
183 |
356 |
|
44. |
Sacramento, California |
701 |
-16 |
164 |
193 |
357 |
|
45. |
Virginia Beach, Virginia |
683 |
-20 |
183 |
175 |
358 |
|
46. |
Raleigh, North Carolina |
697 |
-16 |
180 |
184 |
363 |
|
47. |
San Francisco |
724 |
-13 |
179 |
196 |
375 |
|
48. |
Riverside, California |
685 |
-17 |
180 |
195 |
375 |
|
49. |
Austin, Texas |
687 |
-15 |
179 |
197 |
377 |
|
50. |
Milwaukee |
700 |
-11 |
191 |
193 |
384 |
Improving your credit score after buying a home
There’s nothing you can do about the effect your new mortgage will have on your credit score, but you can focus on other areas of your credit profile to make sure that your score doesn’t fall further. Avoid applying for new credit and keep your credit card balances low. This could be a challenge — you’ll have moving expenses and a new house to furnish — but using as little of your available credit as possible is key to improving your credit score. The closer you get to maxing out your credit cards, the more your credit score will drop. Of course, ensure that you also make on-time payments on all of your debts.
Methodology
To determine how buying a home affects credit score, we used LendingTree’s proprietary financial intelligence platform, My LendingTree, to look at over 5,000 consumers who bought homes in 2015 and 2016. My LendingTree tracked credit scores from when borrowers took out a mortgage until the score returned to its pre-mortgage level, and aggregated for each city. Our definition of cities is from the Census Bureau’s Core-Based Statistical Area (CBSA) boundaries.
This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.
Featured Image Credit: DepositPhotos.com.
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