Whether you are interested in a physician home loan, an FHA loan or a conventional mortgage, determining your credit worthiness (called a FICO Score), is a necessary first step. If you wish to qualify for a physician loan, it’s important to understand what a FICO score is and how it’s calculated.
There is often much confusion about how these scores are calculated. The data used in your credit report to calculate the score can be grouped into five different categories.
Category #1 Payment History (35% of your score)
It’s the number-one rule to having great credit: pay your bills on time. Payment history makes up 35% of your credit report, and breaks down into a few sub-categories:
• Account payment information on certain accounts such as credit cards, retail accounts, installment loans, medical school loans, mortgage, etc.
• Adverse public records such as bankruptcy, judgments, liens, wage attachments, collection items, and/or delinquency
• Length of the delinquencies
• Amount past due on delinquent accounts or collection items
• Recency of past due items, adverse public records, or collection items
• Number of past due items
• Number of accounts paid as agreed
Category #2 Amounts Owed (30% of your score)
Your existing debt also plays a large part in your credit report. However, with the physician loan, doctors are able to have all deferred student loans waived from their debt to income ratio. Other types of debts (mortgages, credits card debt, etc.) are still included in your amounts owed.
• Amount owing on accounts
• Amount owing on specific types of accounts
• Lack of a specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
Category #3 Length of Credit History (15% of your score)
This is pretty straightforward: how long has your credit been established?
• Time since accounts/loans opened
• Time since accounts/loans opened, by specific type of account
• Time since account activity
Category #4 New Credit (10% of your score)
Constantly opening new accounts can be damaging to your credit score. Managing your existing debt and avoiding opening new accounts can positively impact your credit score. The areas examined in this category are:
• Number of recently opened accounts, loans, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems
Category #5 Types of Credit Used (10% of your score)
This category takes a look at what kind of accounts you’ve got. A mixture of accounts usually generates better scores than reports with only numerous revolving accounts (credit cards).
• Number of various types of accounts (credit cards, retail accounts, medical school loans, mortgages, etc.
A few other things to note:
• A FICO score takes into consideration all these categories of information, not just one or two.
• Many banks offering the physician loan require a minimum FICO of 680. While there are some exceptions, it is extremely important to be aware of your credit score and manage it accordingly.
• The importance of any factor depends on the overall information in your credit report.
• Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
• Your score considers both positive and negative information in your credit report.
Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.
• Most lenders offering the doctor loan will not count student loans from medical school against the physician to determine qualifying ratios.
To learn more about how your credit score can impact your ability to secure a physician home loan, contact us.