After spending months (or even years) boosting their credit score in order to qualify for the best possible mortgage, new homeowners are often dismayed to see their score fall after finally purchasing their dream home. Perhaps even more alarmingly, this decline often lags several months behind the purchase, making buyers question what actually caused it to happen. Luckily, a new study by LendingTree shows that this is not only normal, but generally corrects itself in less than one year! Keep reading to learn why scores fall after buying a home, how large you should expect the decline to be, and when you can expect the score to return to normal.
First of all, it's important to understand why taking out a mortgage negatively influences your credit in the first place. Although it might seem like being approved for such a large responsibility should improve your trustworthiness, credit scoring companies view it differently (at least in the short term). In reality, taking out a mortgage hurts your credit in two ways: first, it greatly increases the amount of debt you owe, which is the driving force behind the score decline; second, it adds a new credit item to your report, which automatically causes a small decline on its own.
Now that you know why the decline is happening, the next thing to know is how much of a decline you should expect. After analyzing credit information from more than 5,000 consumers who took out a mortgage, LendingTree found that the average score declined by about 15 points, with individual credit scores in the sample declining by as much as 40 points. The study also examined the difference in score changes across the 50 largest cities in the nation, finding that consumers in Milwaukee and Minneapolis experienced the smallest drops (11 points) and consumers in Virginia Beach experienced the largest drops (20 points).
As for the timing of these credit score changes, the study found that on average scores reached their lowest point 160 days following taking out the mortgage. Why the drawn-out decline? As it turns out, mortgages are not immediately reported to the credit bureaus; instead, mortgage lenders typically report the loan only after the first payment has been made and may also delay the report according to their own particular reporting cycle.
After reaching their low point, scores then take about the same amount of time (161 days) to return to their pre-mortgage level. This means that credit scores take a total of approximately 10-11 months on average to normalize following the commitment to a mortgage. Of course, at that point buyers can expect to see net gains in their score as they make further payments on the mortgage and reduce their debt balance!
To learn more about the study and see how mortgages affected the credit scores of buyers in each of the nation's 50 largest cities, click here.
