The Role of Credit Scores in Physician Mortgage Approval and Rates
While some people have the means to pay for a home in cash, the vast majority of homebuyers require mortgage financing to purchase real estate. This is especially true for first-time homebuyers and younger professionals, including young physicians.
The good news is that various types of mortgages are available to doctors, even young doctors who haven’t yet finished their training. The requirements for approval vary depending on the type of mortgage and the lender, but they all have one thing in common:
You’ll need good credit to get approved.
Considering applying for a mortgage but concerned about your credit?
Here’s what you need to know about the role credit scores play in physician mortgage approvals and how they can affect your interest rates.
Applying for a Mortgage? Physicians Have Options
For physicians considering homeownership, there are a variety of different financing options available. Here’s an overview of the four main mortgage options, plus some of the pros and cons of each.
Conventional Loan
Most potential homebuyers rely on the conventional mortgage for financing (or refinancing) a property.
Anyone can apply for this type of mortgage to purchase any kind of property, including:
Single-family homes
Second homes
Vacation homes
Investment properties
With a conventional loan, you can choose a fixed-rate mortgage or an adjustable-rate mortgage. Regardless, you’ll need to make a down payment of 20% of the purchase price. If you don’t, you’ll have to pay private mortgage insurance (PMI) until your loan-to-value ratio hits 80% of the home’s value.
Physician Loan
A physician mortgage loan is an excellent option for newly practicing medical professionals seeking higher loan amounts with zero to low down payments and no PMI.
Most lenders offer physician mortgages to medical doctors and dentists with MD, DO, DDS, and DMD designations.
Some lenders extend doctor loans to other healthcare professionals, including:
Veterinarians (DVM)
Podiatrists (DPM)
Pharmacists (PharmD)
Certified Registered Nurse Anesthetists (CRNA)
Chiropractors (DCM)
Medical residents and fellows
Looking to make a home purchase before starting your new job?
You can verify and prove your income with your lender simply by providing them with a copy of a signed employment contract specifying your future income. This is key for residents and fellows with no work history but who are guaranteed to earn a physician’s salary in the next few months.
One of the downsides to a physician mortgage is that it limits the type of property you can buy; lenders usually only finance the purchase of a primary residence.
Another factor to keep in mind is that some lenders only offer adjustable-rate mortgages, which can lead to higher interest rates and higher monthly mortgage payments in future years.
Read more: Mortgage Loan Programs for Medical Professionals [Varying Disciplines]
FHA Loan
Contrary to popular belief, the FHA loan is not limited to first-time homebuyers, nor are they offered only to “lower-income buyers.”
FHA loans do, however, have floor and ceiling limits. For 2023, the floor limit (the minimum amount you can finance) for a single-family home is $472,030. The ceiling amount (the maximum amount you can finance) is $1,089,300.
VA Loan
Veterans and Armed Forces members may find the VA mortgage to be their best bet. VA loans are offered through private lenders but backed by the federal government, meaning the lender assumes less risk than with an individual borrower.
Some of the benefits of a VA loan include:
Zero to low down payments
No PMI
No minimum credit score requirement
Lower interest rates
Which Loan Option Should You Choose?
As a medical professional, you have many lending options, but your credit score may preclude you from qualifying for some. The higher your score, the more lenders you’ll find willing to approve you for a mortgage.
What is a Good Credit Score?
Credit scores range from 300 to 850 and are broken down into five different ranges:
Excellent: 800 to 850
Very good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579
The higher your score, the more confidence mortgage lenders will have in you, which means that you’ll have more loan types and more lending options to choose from.
Lenders want low-risk borrowers, so no matter what loan program you apply for, your credit score will be one of the first things the bank looks at.
Sometimes you’ll hear the term FICO® score used instead of credit score. They refer to the same thing. FICO® is simply a specific model used to calculate scores.
How Are Credit Scores Determined?
There are three national credit bureaus: Experian, TransUnion, and Equifax. All of them provide individual credit reports based on several different factors, which can include:
Payment history
Length of your credit history
Credit utilization rate
Payment history refers to whether or not you pay your bills on time. Debts that go into collection, missed payments, and late payments all affect your payment history negatively.
The length of your credit history refers to how long you’ve had open credit cards, loans, and accounts that report to the three bureaus. Showing that you’ve paid your debts on time over a longer period will give you a better score than someone who just received their first credit card and has only made a few payments thus far.
Credit utilization rate refers to the amount of credit you have and the amount you’ve used; the lower the percentage, the better. Having available credit that you don’t use will increase your score. “Maxing out” credit cards will lower it.
Why Is My Score Different Between the Three Bureaus?
If you’ve ever viewed your credit report, you may notice that your scores vary slightly between these three agencies. That’s because not all agencies have all of the same information at the same time.
Lenders are not required to report your information to any of these credit bureaus, let alone all three. So it’s not uncommon for them to be working with slightly different data.
That said, if you check your scores from all three bureaus, they’ll likely be close in range. If you ever see that one score is significantly lower than the other two, you should check for errors and dispute them.
When Applying for a Mortgage, Credit Scores Matter
Every mortgage type has a different credit score minimum they’re willing to accept.
Conventional loans typically require a minimum of 620, while FHA loans are sometimes extended to buyers with scores as low as 580. VA loans don’t have a minimum score requirement. Because they’re government-backed, they offer more protection for the lender, so your personal score is less of a factor.
To participate in a physician loan program, most lenders require that you have a score of 700 or more.
Some lenders may approve a physician loan with a score as little as 680, but then require that you make a down payment. One of the key benefits to the doctor mortgage loan is that your down payment can range from 0% to 10%, as opposed to the 20% required for a conventional one.
Unfortunately, for doctors with a score below 700, getting approved for 100% financing can be difficult.
In addition to 95% or 100% financing, borrowers with high scores are sometimes also offered lower interest rates. Again, it’s because a higher score indicates good creditworthiness.
The goal is to get your credit score as high as possible so lenders view you as a low-risk borrower. If you can do that, you could get approved for a jumbo loan in excess of $1 million and not have to put any money down.
Your Debt-to-Income Ratio Matters Too
Your debt-to-income ratio is another significant factor lenders look at when you apply to purchase or refinance a home.
Debt-to-income ratio (DTI) refers to the percentage of your monthly income that you use to pay your current debt obligations. For example, if you gross $20,000 per month and your current monthly debts (student loan, credit card, rent, car payments, etc.) total $9,000, your DTI is 45%.
Most conventional lenders won’t even consider you for a loan if your DTI is higher than 45%, and that’s why so many physicians opt to apply for a physician home loan instead.
For newly practicing physicians, medical school student loan debt often puts them over the 45% mark. Physician mortgages treat student loan debt differently, looking only at the amount you make through an income-driven repayment plan.
This is a huge benefit for younger physicians earning a lower salary than more experienced physicians earning higher incomes.
How to Increase Your Credit Score and Keep it High
While increasing your score can take time, there are some steps you can take to boost your score and keep it high.
Pay Your Bills on Time
Payment history is important, so be diligent in paying all your bills on time, no matter how small or large the required payments may be.
Live Within Your Means
If you can’t make a purchase with cash or a debit card, don’t make it at all. Rely on the funds in your checking and debit accounts rather than racking up more debt by making purchases on credit cards.
Set Up an Income-Driven Student Loan Repayment Plan
More than 70% of medical school graduates owe more than $250,000 in total student loan debt, which is seven times what the average college grad owes.
In 2023, the average cost of medical school was $57,574 per year, with in-state public colleges costing a total of $159,620 and out-of-state private colleges costing $256,412.
Enrolling in an IDR that caps your monthly loan payments to 10% of your discretionary income offers two benefits:
It reduces your monthly student loan payments, allowing you to build your savings account or pay down credit cards.
It reduces your DTI when applying for a physician mortgage.
Decrease Your Credit Utilization Rate
The goal is to have a lot of credit available and use very little of it. You can do that by:
Asking for increased lines of credit but not using it
Having credit cards that you never use
Taking out a personal loan and using only a tiny percentage of it
Putting a percentage of every paycheck into a savings account is essential. However, if you’re looking to increase your score quickly, you might want to consider using some of your savings to pay down credit card debt and decrease your credit utilization rate to help increase your score.
Improve Your Credit Score Before Applying for a Mortgage
Loan applications can ding your credit score, so before you apply, run a credit report on your own to see where you stand.
If your score needs improving, take measures to boost it. This is better than applying for a loan and getting denied, as both can cause your credit score to take a hit.
Recap
Whether you’re ready to buy a “starter” home or purchase your dream home, the physician mortgage makes it possible for young healthcare professionals to achieve the goal of homeownership.
But before you apply, make sure your credit score is sufficient. If it’s not, take some steps to improve it before applying for a loan.
To find the physician mortgage that’s right for you, contact LeverageRx now.
