Can Buying a House Build My Credit?

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Buying a house isn’t a one-way street to excellent credit, but that doesn’t mean it will leave a scar on your report, either. Buying property revolves around you, the borrower, and your commitment to paying off the loan. When done correctly, it can improve the strength of your credit score by highlighting your reliability and financial acumen.

So, what does buying a house do to your credit? How is credit even established? And what can you do to improve your score?

How Your Credit Score is Calculated 

Before exploring the homebuyer’s credit journey, it’s essential to understand a credit score’s composition. There are five main components in a FICO credit score:

35% | Payment History

The most impactful metric of your credit score is your payment history. When someone is lending you money, they want to ensure you can pay it back. If you miss even a single payment, a derogatory mark can sit on your credit report for seven years. A good and consistent payment history, on the other hand, can boost scores significantly.

30% | Credit Utilization Rate

Your amounts owed are a major determining factor in your score. The credit utilization rate is calculated by taking your total amounts owed and dividing it by the total amount of available credit. Many financial experts say you should keep your credit utilization rate under 30%.

For example, if you own a credit card with a $10,000 limit and are currently using $1,000, your credit utilization rate is 10%.

15% | Credit History Length

The longer your credit history, the better your score. This metric pulls the longest, shortest, and average age of your open lines of credit to determine your creditworthiness.

10% | Credit Mix

Your credit mix is the makeup of all your credit accounts. If you have credit cards, car loans, home loans, and other credit lines, chances are you have a good credit mix. Keeping your accounts diverse shows lenders you can responsibly manage multiple lines of credit.

10% | New Credit

The final major factor when understanding a credit score is the amount of new credit on your report. New credit is the number of new accounts you’ve opened and any recent hard credit pulls you’ve had. For example, a financial institution will examine your credit file before making a lending decision. Keeping the number of hard inquiries to a minimum can increase your score.

How Your Credit Can Impact Buying a Home

These factors aren’t the only ones to consider, but they make up the bulk of your credit report. Here’s how they interact with the homebuying process:

Getting a Loan Starts By Pulling Your Credit Score

When a lender does a hard pull on your credit, it can temporarily hurt your score. It also adds a new account to your report which is a temporary liability. According to Equifax, hard credit pulls affect your credit for roughly two years.

Your Mortgage is Added to Your Credit Mix

Once you take out a mortgage loan, it’s added to your credit mix. New accounts diversify your loans and boost your credit score (especially after the first few years). The only caveat is that your credit history length will decline because the mortgage is recent, negatively affecting your current credit rating. 

The loan will also tack on additional debt and raise your credit utilization rate. And while all of these are detractors in the short term, when you start paying down your mortgage, it will improve your score.

Monthly Payments Come Next

If you’re making consistent monthly payments, it will boost your credit significantly. Conversely, a single missed payment can lower your score. Paying down your mortgage will also reduce your credit utilization rate and impact other important metrics that calculate creditworthiness.

The Bottom Line

Buying a home can temporarily cause a credit score drop, but will also set you up for a healthy score in the future by adding an additional asset to your credit mix. Mortgage payments allow you to demonstrate financial discipline to lenders. When done correctly, buying a home is a great way to increase your credit score over time and will enable you to receive more favorable loans in the future.

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