People might think having a medical degree can help you get a home loan. But it’s more complex and nearly impossible for physicians. Medical professionals, especially recent graduates, often have a high debt-to-income ratio because of student loans, making it difficult to qualify for conventional home loans. Doctors also have trouble when they don’t have any savings.
Fortunately, there is an alternative tailored explicitly for physicians called the physician mortgage loan. This mortgage is an excellent option for new doctors because it allows them to lock in low-interest rates, avoid making a substantial down payment (sometimes even a 0% down payment), and spread their payments over a shorter time.
Let’s look at what the physician loan is all about.
What is a physician loan?
A physician mortgage is a special home loan only made available to physicians and other qualified medical professionals. Mortgages for physicians are primarily based on their projected future income, so they have more lenient qualification requirements than those for traditional loans. This is an appealing idea for young doctors just starting.
The salary for a resident or fellow is significantly lower than that of an attending. Lenders will sometimes accept a letter of employment offer instead of other verification forms when determining eligibility for a loan. When first starting in life, this can significantly affect your total debt-to-income ratio when applying for a mortgage.
How does a physician mortgage work?
Medical professional loans are structured the same way as any other mortgage. Even though each mortgage lender has their own set of terms, you should be able to choose between fixed-rate and adjustable-rate mortgages and an interest rate based on your credit history. Some lenders may have more lenient underwriting standards and require less of a down payment than they would for a conventional loan.
Who can qualify for a physician mortgage loan?
The following are some of the minimum standards a borrower must meet in order to be approved for a physician loan:
Type of degree. Hold a relevant medical degree, like an MD, DDS, DVM, DPM, or DMD. Professionals like nurse practitioners might also be eligible for doctor mortgage loan programs.
Employment. Having a contract of employment for a new medical doctor or resident. A doctor may qualify if they can demonstrate that they are self-employed through their practice.
Creditworthiness. You’ll need good credit to qualify for a physician loan. Most programs require a score of at least 700 to be accepted, but some will accept doctors with a score of 680.
Down payment. Mortgages for physicians can range from those with no down payment to those with a down payment of less than 20% of the loan’s total value.
What are the benefits and drawbacks of a physician mortgage loan?
There are a few benefits and drawbacks to a physician mortgage loan. You should take a look at them before taking the next step.
No down payments. There is often no down payment needed for doctors seeking mortgages. With this loan, you can avoid paying private mortgage insurance and lock in a low-interest rate with no down payment. Of course, a down payment will reduce your monthly payment and the interest you pay over the loan’s term if you can. Furthermore, a down payment will immediately increase equity.
No private mortgage insurance (PMI). A conventional mortgage requires a borrower to put down at least 20% of the purchase price before private mortgage insurance (PMI) can be waived. PMI, or private mortgage insurance, is a monthly premium added to your mortgage payment to safeguard the lender in the event of your default. Some lenders may consider you a “risky” borrower if your down payment is small. Essentially, the PMI you pay guarantees your lender that they will be compensated in the event of a default on your loan.
However, with a physician mortgage loan, you can avoid private mortgage insurance altogether, even if you have a small down payment.
Debt-to-income ratio and student loans. Most conventional mortgages stipulate a debt-to-income ratio of 43% or less as a prerequisite for approval. It may seem impossible to stay within that percentage if you’ve taken on substantial medical school debt. However, when calculating your DTI, physician mortgages do not include your total student loan payment.
Limited loans. A conventional mortgage’s maximum conforming loan amount is between $647,200 and $970,800. In 2023, the baseline loan limit will rise to $715,000, and the high limit will be about $1,073,000. In contrast, there is no such borrowing limit on physician mortgages, giving doctors and their families more financial freedom.
Closing on a house before starting a job. Due to the possibility of a 100% loan guarantee, more significant loan limits are now available, albeit at a costlier interest rate. You can close on your new residence approximately 90 days before you start your new job if you meet more lenient job-requirement qualifications. You might need to create a savings or a checking account, or even both, with your lender to further solidify your financial relationship with them.
Interest rates. A drawback of physicians’ interest rates is that they have higher rates than conventional loans. Most conventional mortgage loans have a 4.5% interest rate, but a physician loan starts at 4.75%.
Moreover, conventional interest rates have fixed rates, but physician loans have variable rates that can change over the course of the loan’s term.
No down payments. In addition to increasing the likelihood that you’ll spend more on a home than you can reasonably afford, skipping the down payment can quickly cause you to owe more on your mortgage than the home is worth.
Student loans and mortgage payments. Even if they do not consider student loans, that does not mean they are still there. You still have to pay them, and now you have your mortgage payments to bear along with them. If not managed properly, it can lead to you accumulating a lot of debt. In that case, it is better to consider consolidating your debts. This way, you can pay off your debts systematically and manage your payments better.
A physician loan is a great way to secure financing for a house for new physicians. You should remember that this loan comes with advantages and disadvantages. Therefore, it is advisable to look into your financial situation. You can also talk to a financial planner to help you understand whether you can take on the extra debt and your student loans.
The decision to own or rent a home is a big one. So it is essential to consider all options before leaping.
Loretta Kilday is an attorney.