How a Doctor Mortgage Impacts Your Credit Score

Getting a doctor mortgage loan can help you qualify for a home loan that you might not otherwise get with a conventional loan. However, even though a physician borrower might get access to more flexible underwriting criteria than they’d see with a conventional mortgage, it can still impact your credit score.

Here’s what to know about getting a physician mortgage loan and how it can affect your credit score as you move forward toward homeownership.

1. Lowers your credit score temporarily

First of all, any time you apply for any loan, you’ll likely see a hard credit inquiry on your credit history. This can result in a temporary hit to your credit score, sending it a little bit lower. The good news, though, is that as you make your monthly mortgage payment on time and in full, your score will likely rebound.

2. Affects your debt-to-income ratio

Your debt-to-income ratio (DTI) is a measure of your total monthly loan payments in relation to your monthly income. For example, your credit card debt, mortgage payment, student loans, car loan and other debt payments are included. 

Adding a mortgage monthly payment to your monthly obligations increases the ratio of debt payments you’re making to the amount of income you bring in each month. A high DTI ratio can lead to a hard time getting another loan later unless you pay down some of your other debt so they’re no longer adding to your DTI.

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3. Impact on credit utilization

In general, installment loans like student loan debt and mortgages don’t impact your credit utilization. Usually, only revolving debt, like credit cards, affects your credit utilization. However, if you get a home equity line of credit later, that’s considered a revolving line of credit and could impact credit utilization. 

When your credit utilization rises, your credit score has the potential to drop. Carefully consider that before using a doctor loan program to get a home equity line of credit.

4. Strengthens your payment history

One of the biggest positive impacts a mortgage loan can have on your credit is the fact that it helps strengthen your payment history. According to the FICO scoring model, payment history is the most important factor contributing to your score. 

If you make your payment on time and in full each month, it builds a positive history that can boost your credit score over time. As your credit score improves, you’ll likely see better interest rates on other loans and get better terms from other lenders and financial service providers.

5. Diversifies your credit mix

Adding another type of loan can help your credit. If all you have is revolving debt, like credit cards, an installment loan, like a mortgage, can help you improve your credit score a little bit. Your credit mix accounts for about 10% of your FICO score, so it gives your credit score a little boost.

6. Gives you a longer credit history

Finally, a mortgage is a long-term loan, usually lasting up to 30 years. The length of your history, as reported on your credit report, matters to your score, so a long-term loan can help add a little bit to your score. With a mortgage, you can see a small increase in your results as long as you maintain that debt.

Strategies to strengthen your credit score

As you strive to be more attractive to mortgage lenders, improving your credit score is a big part of the equation. The information stored with the credit bureaus (TransUnion, Equifax and Experian) is used to determine your score.

By getting a better credit score, you can qualify for a lower interest rate, saving money over the life of the loan. You might also be able to increase your eligibility for a jumbo loan when you have a better credit score. Here’s how to improve your creditworthiness.

Make payments on time

The best way to build your credit score is by making on-time payments. Since payment history is so important, just ensuring that payments are sent by the loan’s due date and in full makes a huge difference. Stay up to date on student loan payments and credit card minimum payments.

Pay off past-due accounts

Next, check to see if you have past-due accounts. These could be dragging down your credit score and limiting your loan options. Before applying for a physician home loan, try to take care of past-due accounts such as medical bills or defaulted student loans by paying them off or bringing them current. This can boost your credit score.

Keep your balance in check

Don’t forget to check your other debt balances. Avoid adding more debt before you begin the home-buying process. Try to pay down your credit card balances to no more than 30% of your available credit and do your best to pay down some of your other debt.

Keep your account applications to a minimum

Lots of applications for new credit can drag on your credit score. As you look for a new primary residence, try to avoid opening new credit cards or getting a new car loan. 

When shopping around for different mortgage programs, try to get your quotes within a two-week period so that they’ll be treated as one inquiry, rather than multiple inquiries.

Set up an income-driven repayment plan

One way to reduce the amount of student loan debt impacting your ability to qualify for a home loan is getting on an income-driven repayment plan. 

If you qualify, you can potentially get a lower monthly payment that leads to a lower DTI. This can help you meet the requirements for the loan amount you’re looking for, and makes it easier to meet your payment obligations.

Qualifying for a doctor mortgage

If you decide that you want to get a doctor loan after medical school, you need to meet certain requirements. First, you might be eligible for a physician home loan even as a dentist, veterinarian, nurse practitioner or other medical professional. Find out what degree requirements come with the loan program.

Also, learn about other qualifications. In some cases, you might need the following information as you apply for a fixed-rate or adjustable-rate mortgage as a medical professional:

• Down payment. This can range from 0% down to 10% down, depending on the lender and the size of your mortgage.
• Employment contract. Even if you don’t have a job right now, you might qualify for a doctor loan program if you have a signed employment contract that says you’re ready to start within 90 days.
• Purchase price. You normally need to be ready with the purchase price of the real estate you hope to buy.
• Personal finance information. In general, any mortgage will require a review of your finances. You usually need at least a 700 credit score to get a doctor mortgage, and might need a higher score to avoid higher rates. You also need to provide information about your budget and debt. You can use a physician mortgage loan calculator to get more information about how it might fit with your personal finances.

The good news is that most doctor mortgages don’t require private mortgage insurance (PMI), making it a little easier to afford the loan. However, if you don’t meet the requirements, you can look at other options, like FHA loans, VA loans and USDA loans, as well as conventional mortgages.

FAQs: How will a doctor mortgage impact your credit score?