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Doctors usually find themselves in a unique position after leaving medical school: They now have large incomes — but also massive student loans. While they can often afford to buy a home and make mortgage payments, their credit history can make lenders hesitate.
“Since medical school costs tend to be astronomical, doctors can carry a lot of debt that would otherwise bar them from securing a traditional mortgage,” says Jeffrey Zhou, CEO of Fig Loans, a personal loan lender based in Sugar Land, Texas.
That’s where physician mortgage loans come into play — a special type of financing aimed at helping medical professionals become homeowners. Here’s how this type of home loan for physicians works.
What is a physician loan?
Physician mortgage loans are private mortgages that come with more generous terms and looser qualifying requirements than most conventional loans. These doctor mortgage loans are geared towards medical professionals who have a harder time qualifying for a typical mortgage due to their considerable college and med school debt and limited savings.
“Due to the requirements for medical education, many doctors are much older before they enter the workforce, and they don’t have the down payment needed to purchase a home; yet, they have the income to qualify for a home,” says Mikell Richards, VP at United Community Bank in Mount Pleasant, South Carolina.
How physician loans work
Physician mortgage loans usually do not require a down payment; lenders can offer up to 100-percent financing. This home loan for physicians also has high limits, typically $1 million or more depending on the mortgage lender. The physician loan’s mortgage limit can vary based on how much you’re financing — for example, the size of a 100-percent financed loan could be capped at $1 million, while a 90-percent-financed one could go up to $2 million.
Most physician loan lenders allow you to have a higher debt-to-income ratio, as well, because they know that new doctors have sizable student loans.
“New graduates and residents often work for very little money and have a lot of student debt, so they may be at a disadvantage for a typical mortgage,” says Luis Strohmeier, CFP, Los Angeles-based partner and wealth advisor of Octavia Wealth Advisors. “Student loans aren’t counted against you with a physician loan, thankfully.”
Keep in mind: While most are geared towards home mortgages, there are other types of physician loans, too, that can help you establish your practice. These can max out at $5 million.
Most, but not all, doctors’ mortgage loans have fluctuating interest rates. They can be refinanced.
PMI for doctor loans
Because a physician loan has low or no down payment requirements, you might expect to have to pay for private mortgage insurance (PMI). PMI is a common added cost that borrowers pay when they put down less than 20 percent of the purchased home’s value.
However, physician loans don’t require PMI. Doctors tend to have high enough incomes to keep the risk low. Lenders figure they’re able to handle both their physician loan’s mortgage payments and student loan repayments.
Avoiding PMI can help you save as much as hundreds of dollars a month.
DTI for doctor loans
Your debt-to-income (DTI) ratio measures your monthly debt payments compared to your monthly income. For example, if all of your debt payments total $1,500 a month and you make $4,000 per month, your DTI ratio is
Conventional mortgages usually have DTI ratio limits of 36 to about 45 percent. The rationale is that if too many obligations vis-à-vis your income, you won’t be able to afford your mortgage payments.
Given the typical student debt of a physician, meeting these DTI requirements can be difficult. For that reason, a physician loan tends to have more flexible DTI requirements than other mortgages, letting your ratio go as high as 50 percent.
Who qualifies for a physician home loan?
Physician mortgage loans are generally available to doctors with specific degrees, including MDs and DOs (doctors of osteopathic medicine). Some lenders provide similar loans to other healthcare professionals, including veterinarians, dentists and orthodontists who possess DMV, DPM, DDS and DMD degrees.
“Medical doctors, doctors who are currently in fellowship and physicians still completing their residency with the hospital are eligible,” says Kennis Tong, a home loan consultant with Valley National Bank, a regional bank that covers New York, New Jersey, Florida and Alabama. “We verify their status with their employer and by requesting medical school transcripts or diplomas, if necessary.”
Typically, you can only use a physician loan to buy a primary residence. That means you can’t buy an investment property or vacation home with the loan. Some lenders may be more flexible (e.g., letting you buy a multi-family home so long as you live in one unit). Others have additional rules, such as not lending for the purchase of a condo.
Pros and cons of physician loans
Pros of physician loans
- No down payment. Most physician loan lenders offer as much as 100-percent financing for as much as a $1 million loan.
- No mortgage insurance. Physician loans don’t charge PMI, even if you have no down payment.
- Higher DTI ratio. You can qualify with a DTI of up to 50 percent so long as you can show you can afford the payments.
- Looser credit, employment and income standards. You can often borrow right out of school as long as you have a signed offer letter and start working within a few months. You don’t need any job history.
Cons of physician loans
- Variable rates. Physician loans usually aren’t offered with a fixed interest rate (although some lenders do have them). That means you’ll have an adjustable rate after a fixed introductory period, so your payments will change.
- Only for primary residences. You can’t use the loan to buy a second home or investment property.
- Risk of overleveraging. “If, for instance, you purchase a $500,000 house but the value declines if the market corrects and you still owe that $500,000,” says Storhmeier.
- Condos or townhomes potentially not eligible. Many lenders will only offer loans for detached single-family homes.
Which lenders offer physician loans?
Many types of lenders offer physician mortgage loans, including big national lenders, independent mortgage companies and community banks. Among the lenders providing this kind of financing (some including commercial or practice loans) are:
- Bank of America
- BMO Harris Bank
- Fairway Independent Mortgage Corporation
- Fifth Third Bank
- First National Bank
- Flagstar Bank
- Guaranteed Rate
- Huntington Bank
- TD Bank
- United Community Bank
- U.S. Bank
- Valley National Bank
“Spend some time shopping around and talking to loan officers,” says Tong. “For each of these different loans, learn how the process works, the total costs and terms involved and what to expect.”
Alternatives to a physician mortgage loan
A physician loan isn’t the only option available to doctors. If you qualify, you could get another low- or no-down payment loan, such as a:
- Conventional loan – As low as 3 percent or 5 percent down with PMI
- FHA loan – As low as 3.5 percent down with at least a 580 credit score and FHA mortgage insurance
- VA loan – Available to eligible servicemembers and veterans for no money down and with no mortgage insurance
- 80/10/10 piggyback loan – Two loans for 90-percent financing (80 percent on the first loan and 10 percent on the second), plus a 10 percent down payment
Additional reporting by T. J. Porter