October 1st 2021

Buying a home in today’s hot market is stressful enough. But what many new homeowners taking out a mortgage may not realize is that it can also take a toll on their credit scores.

The good news: The damage isn’t permanent. While credit scores typically fall after someone gets a mortgage, it usually takes just under a year—about 339 days—for them to rebound, according to a recent survey from LendingTree, an online lending marketplace.

The online lending marketplace looked at data from more than 6,000 consumers living in the nation’s 50 largest metropolitan areas in 2020. LendingTree looked at their scores before and after taking out the loans to figure out how quickly their scores recovered.

“After you get a mortgage, it takes a little time to recuperate and let your credit score rebound,” says Jacob Channel, senior economic analyst for LendingTree. “If you have a high credit score to begin with, the decline will only be 20 or so points. So it probably won’t have a significant effect on your ability to access credit.”

Even those whose credit scores fall by more than 20 points will still likely see them return to pre-loan levels within a year.

After closing on the mortgage, credit scores took an average of 165 days to reach their lowest points, according to LendingTree. Then they took an average of 174 more days to rebound to pre-loan levels.

When a borrower gets a mortgage, it adds a large balance to the borrower’s report. Because credit-scoring agencies take into account the amount of debt a consumer has accumulated, the score will typically decrease. However, paying the mortgage bill on time every month demonstrates the borrower’s ability to handle significant debt. This strengthens the borrower’s overall credit rating over time.

“Living within your means, using debt wisely, and paying all bills—including credit card minimum payments—on time, every time, are smart financial moves that can help your credit score rebound following the purchase of a home,“ says Gerri Walsh, president of FINRA Investor Education Foundation. The nonprofit organization supports educational and research projects to help underserved Americans make sound financial decisions.

The chief factors influencing the speed with which a score falls and rebounds are the age of the creditor and how competitive an area is in terms of securing a mortgage, says Channel.

Borrowers with high credit scores can often snag the lowest mortgage interest rates and get loans with lower fees because lenders see them as less likely to default on their mortgages. In the current competitive housing market, borrowers need to have a credit score in the 700s to get approved for a mortgage, he says.

“Younger homebuyers [often] don’t have a strong credit score, so they are more likely to take a significant hit on interest rates for a mortgage,” Channel adds.

Call or Text Teresa at 609-780-1434 to find your new Shore home!