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Will Selling a House Improve My Credit Score?

Having a good credit score gives people an advantage when it comes to getting higher credit limits, lower interest rates, and qualifying for loans—particularly mortgage loans. It is not impossible to buy a house with bad credit, but it will be more challenging.

Some may wonder if selling a house, and therefore getting rid of a big chunk of debt might improve their score. While this might sound logical, credit score calculations are much more complicated than that. There are some instances when selling a home won’t have much impact. It may also do more harm than good. 

What Makes Up My Credit Score?

Credit scores fluctuate constantly, and a mortgage is just one of several factors used to calculate it. A change in someone’s credit profile, like getting a mortgage or paying it off, can contribute to a change in the overall score, but no one event by itself is directly responsible for making it go up or down.

A credit score is less about the amount of debt and more about a person’s ability to pay it off. The following financial and personal data contributes to the overall score:

    • Payment history. A steady record of paying bills in full and on time is good for credit.
    • Debt-to-income ratio. The lower the amount owed compared to how much a person earns makes it more likely they’ll be able to keep up with payments.

  • Length of credit history. The older credit accounts are, the more they count towards a good credit score. A brand new credit card or loan represents a greater risk to lenders.
  • Credit mix. The credit bureaus prefer to see a mix of different types of credit such as credit cards, retail accounts, installment loans, and mortgage loans. While it’s not necessary to have every type of credit, having only one can count against the score.
  • Credit limit compared to usage. Maxing out credit cards and lines of credit reflects negatively on one’s credit score.

Credit bureaus use all of these bits of information in a complex equation to come up with a credit score. It uses the most recent data reported by credit card companies and lenders, so it changes often. 

Credit Ups and Downs For Homeowners

So, is owning a home good or bad for your credit score? It depends. For someone living within their means, it can be good. For those struggling financially, it can be bad. 

In general, the longer a homeowner has a mortgage, the better their credit score, as long as they make all of their payments on time. On the flip side, the following things will hurt a homeowner’s credit:

  • Late payments and missed payments. This will not only hurt the credit score but could lead to foreclosure.
  • Paying more than you can afford for a house. Overextending by taking on too much debt makes it difficult to make monthly payments.
  • A sudden unexpected loss of income. This will affect the debt-to-income ratio, as will racking up debt with credit cards or other loans. Both will cause a dip in the credit score.

It’s also worth noting that even trying to buy a home can affect credit. When applying for a mortgage, lenders do a “hard credit inquiry” which temporarily lowers the credit score by a few points. Once the financing goes through, the score should bounce back—again, assuming payments are made on time.

Pros and Cons of What Selling a House Means to Credit Bureaus

There are two ways that selling a house can help your credit score:

  • Getting a new mortgage for a less expensive home will result in a more favorable debt-to-income ratio. This may also allow the borrower to qualify for a lower interest rate. The result will be a monthly payment that is easier on the budget and fewer missed or late payments.
  • If not buying another home, the seller can take the proceeds and pay down other debts like credit cards and student loans. Less debt means a better credit score, and selling the house for cash can speed up the process, as the seller doesn’t have to wait for the buyer to get financing.

While these best-case scenarios might boost a credit score, they probably won’t help as much as you might think. 

new homeowners
Image by interstid by Canva.com

Here’s how selling a house can hurt your credit score:

  • Sellers will need to pay off their existing mortgage as well as any unpaid taxes, utilities, liens, open lines of credit balances, and any other costs of selling the house. If the proceeds from the sale won’t cover it all, it will result in even more debt and a worse credit score.
  • Eliminating a mortgage entirely from a credit profile means no more monthly payments. Demonstrating one’s ability to make regular monthly payments is a huge plus for a credit score.
  • If selling the house leaves the homeowner with only one type of debt, for example, some credit cards, the lack of a good credit mix could hurt their score.
  • Credit bureaus only care about debt payments, not how much money someone has sitting in a bank. Holding on to the proceeds instead of paying off other bills won’t do anything for the credit score.

Should I Sell My House To Improve My Credit Score?

As a strategy, selling a house simply to improve a credit score is not a great option. There are too many variables to consider and the amount of improvement is likely to be insignificant.

There are more effective ways to improve credit without having to give up the roof over your head. Stick to a budget that reduces spending and increases savings. Cut back on credit card use and don’t borrow any more money. Debt consolidation through the right channels may help too.

Relocating for a new job opportunity, accommodating a growing family, downsizing, or finding your dream home are all great reasons for selling a house. There are more important things to base such a big decision on than how selling a house affects your credit score.

If you’re considering a move, Berkshire Hathaway HomeServices Select Properties would love to help. Contact us today

Cover Image by shisuka by Canva.com

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