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Buying a Home Can Temporarily Lower Your Credit Score

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Buying a Home Can Temporarily Lower Your Credit Score

The way a mortgage affects your credit score is like a kick in the shin.

You make sure your score is good enough to qualify for a home loan, and then the purchase pushes your number down. That drop averages 15 points, although some consumers can see their score slide by as much as 40 points, according to a new study by LendingTree.

"If you have high utilization on credit cards or other credit lines, and then take a relatively large mortgage relative to your income and credit history, you can have a bigger decline," said Tendayi Kapfidze, chief economist for LendingTree.

The study analyzed the credit scores of more than 5,000 consumers who took out a mortgage in 2015 and 2016. On average, scores took an average 160 days to hit their lowest point after the purchase of a house and another 161 days to return to their previous levels (nearly 11 months total).

Credit-reporting firms — i.e., Equifax, TransUnion, Experian — consider your overall debt burden as part of their calculation for your number. They also consider how well you've managed past debt, including whether you made payments on time. Generally speaking, the higher your score, the better terms you can get on a variety of consumer debt.

So while your score is reduced after taking out a mortgage, you might face paying a higher interest rate on, say, a new credit card or car loan.

"You might want to wait before taking on other credit obligations, if your score drops," Kapfidze said.

Cities with fastest credit score recovery post-mortgage

City

Average initial credit score

Average decline in score

Total days until recovery

1. Richmond

693

13

266

2. Minneapolis

701

11

267

3. Salt Lake City

704

15

272

Source: LendingTree

It's worth noting, however, that it can take a couple of months after you settle on a mortgage for your lender to alert credit-reporting firms that you have the loan, according to LendingTree.

Credit scores range from about 300 to 850, with scores above 700 considered good or excellent. Someone with a fair credit score that falls between 580 and 669 will pay about $45,000 more in interest over their lifetime on loans and credit cards versus a consumer with very good credit score of 740 or higher, according to separate research from LendingTree.

Cities with slowest credit score recovery post-mortgage

City

Average initial credit score

Average decline in score

Total days until recovery

48. Riverside, Calif.

685

17

375

49. Austin

687

15

377

50. Milwaukee

700

11

384

Source: LendingTree

The national average mortgage debt is $201,811 according to Experian data released earlier this year. However, some states (or local housing markets) come with averages far above that, including Washington, D.C., with an average mortgage debt of $406,035, and California, at $347,652.

In other words, that's a lot of debt to add to your credit report.

The payoff, though, comes down the road when your credit score recovers and is poised to go higher — assuming you've consistently paid your mortgage and haven't gone hog wild taking on new debt.

So if you are careful to do everything to preserve and improve your credit otherwise, buying a home will turn out to be a boost in your score over the long run.

"Ultimately it will recover and get better because your mortgage shows other lenders that you're a responsible borrower," Kapfidze said.