Physician mortgage loans: Pros and cons for doctors buying a home

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What is a physician mortgage loan?

Physician mortgage loans help doctors purchase a home, often with no down payment or mortgage insurance and looser qualifying requirements. Physician loans can also be refinanced. They are ideal for doctors and other medical professionals who have a harder time qualifying for a typical mortgage due to their considerable college debt and limited savings.

“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,” explains Jeffrey Zhou, CEO of Fig Loans, a personal loan lender based in Sugar Land, Texas.

“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,” adds Mikell Richards, regional sales manager at United Community Bank in Mount Pleasant, South Carolina.

How does a physician loan work?

Physician mortgage loans can offer up to 100-percent financing without the need for private mortgage insurance (PMI), which comes standard with conventional loans when you put less than 20 percent down. This cost equates to a portion of your loan amount annually, so eliminating this expense can save you a lot of money.

Physician loans also have high limits, typically $1 million or more depending on the mortgage lender. There can be different limits based on how much you’re financing — for example, 100-percent financing could be capped at $1 million, while 90-percent financing could go up to $2 million. There are other types of physician loans, too, that can help you establish your practice — these can max out at $5 million.

Most physician loan lenders allow you to have a higher debt-to-income ratio, as well, because they know that new doctors have sizeable student debt.

“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.”

Who can get a physician loan?

Physician mortgage loans are generally available to doctors with specific degrees, including MDs and DOs. Some lenders provide similar loans to other healthcare professionals, including veterinarians, dentists and orthodontists who carry 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 diploma if necessary.”

A physician loan is a viable route if you’re confident you can manage all of your debt payments — including student and credit card debt — on top of your mortgage. If you know you’re going to move within a relatively short timeframe, it might not be worth it, Zhou says.

Cost of a physician loan

Typically, the same closing costs associated with a traditional mortgage apply to a physician loan.

“Our bank, for example, charges a flat $1,175 origination fee regardless of the loan program,” Tong says.

Are physician loans a good idea?

Pros

  • 100-percent financing of $1 million or more
  • No mortgage insurance
  • Higher DTI ratio
  • Looser credit, employment and income standards

Most physician loan lenders offer as much as 100-percent financing, meaning you don’t need to make a down payment, and you won’t be required to pay PMI even if you put nothing down. You might not need as high a credit score to qualify, either, and, unlike conventional loans, you can often have a DTI ratio higher than 50 percent and don’t need an established income or job history — in fact, you can close as much as 90 days ahead of starting your employment,  Strohmeier says.

“Usually, a doctor just starting out will see a substantial increase in their income as they progress through their career, which is why these lenders are more flexible with this loan product,” Richards says.

Cons

  • Adjustable rates
  • Only for primary residences
  • Risk of overleveraging
  • Condos or townhomes potentially not eligible

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, which changes at certain intervals and can either increase or decrease your monthly mortgage payment.

There’s also the risk of becoming underwater on your loan if your home’s value drops, notes Strohmeier, “if, for instance, you purchase a $500,000 house but the value declines if the market corrects and you still owe that $500,000.”

Physician loans also typically can’t be used to purchase an investment property or a vacation or second home, and condos, townhomes and multifamily properties might not qualify, either.

Lastly, because there’s no down payment requirement, you won’t have a lot of equity at the outset with a physician loan, which can be an issue if you end up needing to sell, Richards points out.

“In these instances, borrowers need to be confident of their ability to make their loan payments and ensure that they have some payment reserves to fall back on in case there is ever an adverse impact on their earnings,” Richards says.

Where to get a physician loan

Physician mortgage loans are offered by many types of lenders, 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
  • Caliber Home Loans
  • Citizens Bank
  • Fairway Independent Mortgage Corporation
  • Fifth Third Bank
  • First National Bank
  • Flagstar Bank
  • Guaranteed Rate
  • Huntington Bank
  • TCF
  • TD Bank
  • Truist
  • United Community Bank
  • U.S. Bank
  • Valley National Bank

“Spend some time shopping around and talking to loan officers,” Tong recommends. “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

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