Did you know there are several loan programs designed particularly for doctors? For example, the banks created physician mortgage loans because of physicians’ unique challenges when they borrow money.
Due to massive student loan debts, physicians’ high debt-to-income ratio (DTI) makes it difficult to get a mortgage loan.
We’ve seen numerous physicians struggling to get a conventional mortgage that fits their current situation.
But there’s an alternative to a conventional mortgage: the physician mortgage loans. This unique type of mortgage loan can help you get:
- low-interest rates,
- reduce the overall amount you have to pay over the loan life, and
- avoid massive down payments.
But is it the right choice for you? This guide will show you all the relevant information you need to make the right choice. In addition, this guide will surely help you out if you’re a new physician.
With that said, let’s begin.
What Are Physician Mortgage Loans?
A doctor or physician mortgage loan is made for medical professionals and usually doesn’t require a down payment. However, you might have noticed that with other mortgage loans, you’ll have to pay private mortgage insurance (PMI) if you make a down payment that’s below 20%.
You can skip the PMI and down payment with a doctor mortgage loan if you’re a doctor. This mortgage offer is an attractive deal, especially for new physicians.
Usually, physicians are at a disadvantage when applying for a regular mortgage loan early in their careers. That’s because they often have a high debt-to-income ratio after medical school. As a result, they can’t offer proof of income and employment if they’ve just begun their residency or graduated.
Physician mortgage loans consider all these aspects and allow you to get a mortgage loan. For example, lenders understand that doctors tend to earn more money in the future.
So they’re less likely to default on their loans. And that’s some of the reasons why they’re willing to make comprises.
How Does Physician Mortgage Loans Work?
As said earlier, physician loans work differently from conventional mortgages. The primary advantage of the doctor loan is that you can purchase a home earlier than using regular mortgages.
Physician loans are ideal because you get:
- A down payment of 0-10%,
- Employment flexibility,
- No PMIs
Also, remember that these doctor mortgage loans don’t come with fixed interest rates. So let’s explain more about how the listed points exactly work.
Loan Qualifications For Borrowers
If you have “D” or “O” degrees, you’ll have access to physician mortgage loans. Some loan creditors also offer doctor loans for medical professionals such as orthodontists, dentists, and veterinarians with the below degrees:
- M.D.
- D.S.
- V.M.
- P.M
However, you’ll need more than a degree to qualify for the mortgage loan. Usually, you’ll need to give the lender your proof of employment and income.
Doctor mortgage loans are flexible with these qualifications because they know new doctors would be working in an internship, fellowship, or residency.
Loan lenders will typically accept a contract of employment. This is to help them verify your income if they don’t have to pay W-2s or stubs that reflect their current position.
Other Qualifications You Need To Meet
- A good credit score (usually 700 and above
- Deferred student loans or loans in good shape such as income-driven repayment plan
- DTI ratio of 45% or less (it doesn’t include your total amount of student loan)
Keep in mind that each lender will have slightly different requirements. So you have to shop around to see if you meet the requirements for various loan creditors.
Private Mortgage Insurance
PMIs ensure that your loan lender doesn’t get affected if you should stop making payments. Usually, your creditor will require that you pay PMI if your down payment is less than 20%. Now, the PMIs vary because it’s based on insurance rates.
However, PMI usually costs 0.5 - 1% on each year’s loan amount. So, depending on the loan size, that could be a massive amount of money.
With physician loans, you get the chance to focus on paying off your medical school debt. So you don’t have to worry about PMI, even if you make no down payment.
Property Qualifications
Remember that you can only use physician loans to refinance or buy a primary residence. That means you have to live in the home you intend to purchase or refinance for most of the year. In other words, you can’t use this mortgage loan to finance an investment property or a second home.
Also, lenders won’t give you the chance to finance a condo with a physician loan.
Debt-To-Income Ratio
DTI measures the percentage of the amount of money you direct towards debt compared with your income. Most conventional mortgage loans expect a DTI of 50% or less.
Creditors check your DTIs to make sure you can handle your monthly payments. If your DTI is high, they consider that risky for their businesses. That’s why it’s pretty challenging to get a mortgage loan as a new doctor using conventional methods.
However, physician loans are flexible with their debt-to-income ratio. They’ll examine your car loans, credit card debt, and other expenses. But they would expect current medical graduates to have debt. So it’s not a big deal if you have a high DTI.
Pros And Cons Of Physician Mortgage Loans
We need to look at the pros and cons to answer this question. That can help you make an informed decision. Let’s begin.
Why A Doctor Mortgage Loan Might Be The Right Option
If you’re a new doctor and can’t afford or are not eligible for a conventional mortgage, you can still purchase a house with a physician loan.
Keep in mind: you don’t have to make a down payment or pay for PMI, and the requirements for the DTIs are quite flexible.
Furthermore, you don’t have to provide the typical proof of employment and income needed for most conventional mortgages. An employment contract will work just fine. The advantages you get are what is explained in the previous section.
Disadvantages Of Physician Mortgage Loans
It can be appealing to purchase a home when, under normal circumstances, it shouldn’t be possible. However, physician loans come with their drawbacks.
First, you rarely get a fixed rate for the doctor’s mortgage loans. Usually, physician loans are adjustable rate mortgages (ARMs). Often, you get to pay a lower, fixed interest rate at the starting years of the loan with the ARM.
But after that, the interest rate can (and will) fluctuate, usually increasing. Now, most physicians aren’t usually prepared for higher rates. So the physician loan carries more risk compared to fixed-rate mortgages.
Besides the interest rates changing, physician loans can sometimes have higher interest rates. These higher rates accumulate with time. So physician loans become more costly than conventional loan mortgages with time.
Doctor loans can be appealing initially but more expensive in the end.
Also, you run the risk of getting an underwater mortgage. When you don’t make a down payment on your home, you begin with zero percent equity.
If you can’t afford your payments or your property value reduces while you still owe the original loan balance, you could have a home loan with a higher principal than the home is initially worth.
Should you give up on physician loans then? Not necessarily. If you think it’s too risky, there are alternatives you can try. Let’s go through them.
Other Options For Physician Mortgage Loans
If you’re not sure that a doctor mortgage loan is for you, you can try other home loan options. Some alternatives won’t be available to you immediately if you’re beginning your medical career. However, the ones available to you may save you money in the long run and rightly fit your needs.
Apply For Federal Housing Administration (FHA) Loan
The federal government backs the FHA loan, and the Federal Housing Administration ensures it. So it’s not like other conventional mortgage loans not backed by any government agency.
With this mortgage, the requirements are less strict about your down payment and credit score than other conventional methods. So it’s a good alternative if you don’t qualify for a regular mortgage.
However, FHA comes with limitations on how you loan. But choosing a physician loan or FHA should depend on the property value you want to buy. For example, FHA loans come with lending limits. And the cost for most places for the ceiling and floor is over $800,000 and $300,000, respectively.
So if you prefer a fixed-rate mortgage with less stringent requirements, consider an FHA loan. This loan is the best bet if you don’t like conventional mortgage loans and physician loans.
Qualify For A Conventional Loan WIth PMI
It’s possible to qualify for a conventional mortgage loan but can’t pay down the entire 20%. If that’s the case with you, you can still make a massive down payment as you can afford and pay for PMI.
Regardless of the amount you direct to the down payment, it helps. That’s because it lowers the interest amount you’ll pay on your loan. After that, however, you’ll have to pay for the extra cost of the
PMI.
Even still, it helps you get a mortgage faster, which is lower than the amount you pay for a physician loan. Also, The interest rate won’t increase with the fixed interest rate, so nothing to worry about.
In addition, when your home gets to 20-22% equity, the lenders will cancel your PMI payments. So you won’t be paying the PMI forever. It’s only for a set time.
Apply For A VA Loan
These loans are given to active service members and their spouses and qualified veterans. The Department of Veterans Affairs back the VA loans and permit past or prevent service members from being eligible for a cost-effective mortgage. And it doesn’t matter if their credit score isn’t good.
You don’t have to pay PMI or make a down payment with the VA loan. In addition, compared to physician loans, VA loans have a lower lending limit and lower interest rates.
However, you have to meet the requirements by serving time in the Armed Forces to be eligible.
However, if you do qualify, you’ll enjoy the lower rates.
Save Up For The 20% Down Payment.
If you can save money and make the 20% down payment, you can opt for a conventional mortgage loan. Then, when you pay the 20%, you can avoid the PMI and begin some home equity.
However, you’ll have to meet the requirements to be eligible for the conventional loan. That includes paying W-2s or stubs and a lower DTI for employment verification. In addition, you may not qualify for this mortgage loan until you’re ahead in your medical career path.
Refinance Your Existing Doctor Mortgage Loan
You can refinance your physician loan if you already have one. If you’ve cleared off some of your debt, increased your monthly income, and built equity, you might be in a good position to refinance into a conventional loan.
Have you cleared off some of your debt? Has your income increased? If you have built equity, you might be able to refinance your loan into a conventional one if you answered “yes” to the two questions. That can help you save money.
If you have an ARM physician loan, consider changing to a fixed interest rate loan if you can get a lower rate.
Also, consider refinancing your loan into a shorter loan even though that would increase your monthly payments. However, it will allow you to clear off your home much quicker. And that can help you avoid accumulating higher interests.
If you’ve built equity and have significant money than what you began with, consider refinancing into a conventional loan. Additionally, you get a better deal when you refinance into new physician mortgage loans than before.
However, conventional loans can provide you with more security and lower interest during your home payments.
Monthly Costs Of Physician Loans
The total monthly mortgage payment includes the following factors:
1. Interest
You’ll pay a percentage of interest over the loan life. But it’ll depend on your mortgage rate. You’ll have less interest the longer you make payments on your mortgage. And that’s because the total principal amount on the mortgage decreases with time.
2. Principal
The principal refers to the overall amount you used for your mortgage or your home’s purchase price. A percentage of the total mortgage is directed toward your mortgage each month. So paying down your principal should be your primary focus.
The faster you clear off the principal, the less you pay in overall interest.
3. HOA fees (if applicable)
Depending on where you purchased the home, you may have to pay Homeowners Association (HOA) fees. It usually comes as a monthly payment.
The HOA isn’t included in your mortgage payment, but it’s something you have to remember as part of your overall housing costs.
4. Taxes and insurance
Your insurance and property tax as a homeowner is included in your total monthly mortgage payment. It’s known as escrow, and you can choose to pay these items differently. But keep in mind to save on those bills because they become expensive. Also, it can fluctuate year to year.
Are Physician Mortgage Loans Right For You?
The doctor mortgage loan can be appealing to many new physicians. You can purchase a home regardless of the massive student debt and low salary. However, just because you can doesn’t mean you should.
Some physicians prefer to increase their savings, including their net worth, by continuing to rent and live within their means. Several advantages come with renting, such as lower responsibility, flexibility on the location, cash flow, etc.
That said, it comes with its drawbacks. So we recommend that you do your research and develop a strategic plan. Then, if you can get expert advice on the matter, go ahead. It may save you thousands of dollars in the future.
Final Thoughts
So what’s the bottom line? Physician mortgage loans can be a great choice if you know what you’re doing. It all comes down to playing your cards right. If you don’t know where to proceed, we recommend consulting a professional who can break down all the various aspects discussed in this guide. When you consult the experts, you’ll be able to make an informed decision that can help your financial life less burdensome in the future.
