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Your credit score and history are important when you’re purchasing a loan. Whether you’re leasing a car, applying for a credit card, or hoping to obtain a mortgage, lenders will examine your credit closely to determine if your finances can handle additional debt. But how is your credit affected when you attain a loan?
When you apply for a loan or new credit account, lenders will typically conduct a hard credit pull to examine your numerical score and credit report in order to determine if your finances can handle a new loan or credit account. You will need to issue written consent to your lender before they perform a hard pull.
In general, taking out a mortgage is likely to lower your credit score in the short term. How much it drops is dependent on several factors, including your credit history and payment history.
According to FICO, the data analytics company that developed the famous credit scoring model of the same name, your score may drop an average of 15 to 40 points. However, you may not see this change until a month or so post-closing when your lender reports your first mortgage payment.
In the long run, obtaining a home mortgage can help raise your credit score. Making your monthly mortgage payments shows that you can effectively manage your debt and are taking steps to diversify your credit mix—both of which may help to boost your score in the long run. In studies done by LendingTree and Bankrate, many consumers report that their credit scores matched or exceeded their original scores in less than a year.
Buy Now, Pay Later (BNPL) plans are a type of deferred loan that allow consumers to complete a purchase and pay it back in a series of scheduled installments. While BNPL companies historically didn’t report information to the major credit bureaus, this is beginning to change.
FICO, the company that developed the credit scoring model of the same name, announced they would be releasing a new score model in Autumn that would incorporate BNPL payment plans. They aren’t alone—Affirm, a payment company that issues BNPL plans, has been sharing consumer loan data with the credit bureau Experian in April.
As your credit score may temporarily drop after your mortgage closes, it’s important to not add additional debt to your credit mix. By accruing additional debt, your score may drop further before it has a chance to recover.
Your payment history makes up approximately 35% of your credit score calculation. Experts suggest setting up autopay for your accounts if you have trouble remembering to make your payments. Be sure you’re making all loan payments on time, including your mortgage.
Our Loan Originators are not credit repair experts, but they may offer assistance from a Fannie Mae approved platform for our borrowers. Ready to learn more about how we can help you with your home financing? Contact us!
Homestead Funding offers exceptional customer service and a convenient mortgage process. Whatever your financing needs, our goal is to exceed your expectations.
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