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3 Ways a Home Loan Can Help Your Credit Score

Written by  //  2020/12/04  //  Buying a Home  //  No comments

home loan

Taking a mortgage ultimately lowers your FICO score. However, this loan can also positively impact your credit report if you undertake the right measures upon receiving it. There are a couple of ways that a home loan can help your credit score and below is an outline of some of these ways.

What is a credit score?

A credit score or, in other words, the FICO score is a credit evaluation model designed by FICO. The model aims at determining what your credit limit should be. It does so by awarding you a score of 300 to 850. These scores determine whether a lender can trust you or not.

There are other credit analysis systems, but many lenders, including CalVet Loans, trust the FICO score.

What is a home loan?

A home loan or a mortgage is a loan that helps you with financing a house’s purchasing. There are a lot of things a lender considers before loaning you a mortgage. One of these things is your credit score. An excellent credit score guarantees a chance of getting a home loan.

Given that a home loan is what lenders consider a big loan, taking it affects your credit score. Fortunately, a mortgage can also boost your credit score and improve your overallcredit report.

Ways A Mortgage can Help Your Credit Score

Below are ways a home loan can improve your credit score. Read on to get an insight.

  • Timely Payments

    The only way to boost your credit score naturally when you have a mortgage is through paying your bills on time. Timely payments improve creditworthiness as it indicates that you’re responsible. If you have issues with timely payments due to your schedule, liaise with your bank and set an automatic payment plan.

    Furthermore, making your home loan payments on time also adds to improving your FICO score. Through timely payment, your score improves significantly with time and hoists you back to an excellent rating.

    Additionally, avoid services that promise to raise your score fast. Often at times, these services don’t work but end straining your finances.

  • Keep Your debt-to-income ratio in check

    Regularly analyzing your credit report is essential in tracking your monthly debt-to-income ratio. The debt-to-income ratio calculates your monthly debt payment vis a vis your monthly income. The ratio is the payment from your gross income that goes to paying your debts.

    A low debt-to-income ratio indicates a good credit score as it means you have less debt. Furthermore, it suggests that you’re a responsible borrower. To ensure that you have a low debt-to-income ratio, reduce the number of loans you take. Reducing the burden of debts releases the strain of paying your mortgage on time.

    A DTI ratio of 28% for a mortgage payment is excellent in helping boost your credit score. To calculate the percentage, take your monthly loan payments relative to the monthly gross income and multiple it by a hundred. A good DTI ratio during a mortgage payment guarantees an increase in your FICO score.

    To improve your DTI ratio during a mortgage loan, cut unnecessary credit card debts, and avoid taking other loans within the first six months. Doing so releases pressure on your mortgage payments while relatively lowering your DTI ratio.

  • Considered A ‘Big Loan’

    Unlike other loans, a home loan often comes with great responsibility. Failing to make a mortgage payment on time instantly affects your credit score; conversely, making timely home loan payments improves your score.

    There are no specifics on how each loan affects your FICO score as FICO solely does the calculations. However, a mortgage loan has a significant effect on your score than any other loan. Ensure that you have an excellent DTI ratio by reducing your debts and paying your mortgage on time.

Avoid making purchases that are hefty within the first six months of your home loan payment. Splash purchases ultimately strain your finances when you have a mortgage. Timely payment of your home loan within the first six months propels your credit score.
The above ways indicate how a mortgage loan improves your credit score. Therefore, don’t shy away from taking a home loan to purchase your dream home in fear of affecting your credit score.

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