Photo: Robert Clark
For most Americans, buying a home is likely to be both the biggest single purchase and largest financial transaction of their lifetime. And homeownership is part and parcel of the fabled “American Dream.”
But according to a recent study by LendingTree, while most prospective homebuyers know they should beef-up their credit scores prior to purchase to secure the best possible interest rates, most are not aware how the purchase will affect their score in the short- and long-term post-sale.
LendingTree, a leading online mortgage provider, studied the financial data of over 5,000 consumers who recently took out a mortgage to determine how homebuyers’ credit scores changed in the months following their purchases.
Its analysis found that most scores went down before they went back up. Individual credit scores included in the sample declined as much as 40 points and as little as just 11 points post-sale.
1. Initial drop
On average, scores dropped 15 points and took just over five months to reach their lowest levels. It can take about two months or longer for a mortgage loan to show up on a credit report and start impacting a borrower’s score.
“Mortgages do not appear on credit reports immediately after closing. Typically, the mortgage lender starts reporting to the credit bureaus after your first payment and depending on the lender’s reporting cycle,” reads the study.
LendingTree found that typically, New Orleans, LA homeowners saw their credit scores reach their lowest points in an average time of 133 days, while Milwaukee, WI homebuyers’ scores had the longest decline (191 days).
2. Recovery phase
Scores typically returned to prior levels after an additional 161 days, provided borrowers made payments on-time.
“As time passes, making on-time payments helps a borrower improve their credit score as they demonstrate 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,” reads the study.
At an average of 130 days, buyers in Richmond, VA saw credit scores rebound the fastest, while the rebound for homeowners in Austin, TX lasted an average of 197 days.
3. Surging to new heights
Nearly a year post-sale, most financially responsible homeowners saw their credit scores not only recover, but climb to new heights.
“Eventually, the score returns to its pre-mortgage level and in most cases, surpasses it,” reads the study.
Richmond homebuyers saw their credit scores go through the recovery cycle the fastest (nine months), while scores in Milwaukee took the longest at roughly 13 months.
While there’s nothing consumers can do about the negative effect taking out a mortgage has on individual credit scores, LendingTree advises consumers to focus on the areas that are within their control — keep making all payments on time, avoid applying for new credit, and keep your credit card balances low.
“Missing the first mortgage payments is the biggest mistake some new homeowners make. This is known as early payment default by lenders and often indicates fraud. The underwriting process is particularly designed to try prevent this,” LendingTree chief economist Tendayi Kapfidze tells Livabl.