Timely Mortgage Payments Will Improve Initial Credit Score Drop

When you take out a mortgage, it’s true: your credit report initially falls. What’s the reason for this drop? And how can you quickly reverse it?

The reason for the fall is that you just added a new account, the mortgage, to the mix of accounts on your credit report. It’s no doubt the largest account on your report and it has no payment history attached to it. Once a payment history is established, your credit score will rise.

Craig Watts, public affairs manager at Fair Isaac Corporation, commented on this question. He added this reason to why your credit score would go down when you take out a home purchase loan:

“In almost all cases, taking on new credit will cause the person’s FICO score to drop at least slightly because, statistically, taking on new credit increases one’s chances of running into credit problems in the near future.”

He also brought up a great point about why you should hold off applying for other credit while in the process of getting a home mortgage loan.

“The best example I can think of where this can shock a consumer is in the mortgage escrow process. We’ve heard of consumers whose FICO score barely qualified them for their desired mortgage rate, and unfortunately they lower their score before the close of escrow — by taking out a car loan for example.

When the mortgage lender checks their score one last time before closing escrow, the lender discovers that the consumer no longer qualifies for the offered rate. So the loan offer is withdrawn and the unhappy consumer starts over or settles for a higher rate.”

Just remember: Make timely payments on your new mortgage and your credit score will recover from the “new mortgage” dip.

SOURCE: Bankrate.com