How they work, advantages and disadvantages
- New doctors who have a lot of student debt and no savings may find it difficult to qualify for a conventional mortgage.
- Physician mortgages offer an alternative that overlooks these factors.
- These specialty home loans are available from many, but not all, traditional lenders.
You might think that having a medical degree makes getting a home loan easier. Not necessarily. Traditional home loans penalize you for having a high debt-to-equity ratio, which medical professionals, especially recent graduates, typically have due to student loans. Other negatives for physicians include little or no savings and, in many cases, no permanent employment yet.
On the other hand, physicians are among the most financially stable professionals in the workplace. Once established, they tend to have higher incomes, less overall debt, and most importantly, very low default rates when it comes to home loans. Realizing this, banks and other lenders have come up with a special type of loan suitable for medical professionals called a doctor’s mortgage or doctor’s loan.
What is a Doctor’s Mortgage?
A doctor’s mortgage is a specialized loan available only to medical professionals and certain other professionals. They essentially ignore high student loan debt and low or no savings, especially early in the borrower’s career.
The reason these negatives are temporarily overlooked is that doctors and other professionals usually become wealthy people, with little debt, substantial savings, and very rarely lose their homes to foreclosure.
Although the name suggests that these loans are only available to doctors, many lenders offer the same loans to other high-income professionals, including:
- Certified nurse anesthetists
- Advanced Practice Clinicians
How do physician mortgages work?
Physician mortgages are structured similarly to conventional loans, but are much more accommodating to physicians and other high-income individuals given their uncommon financial circumstances. For this reason, most accommodations must be approved.
For example, doctors can pay less than 20% while avoiding private mortgage insurance. The PMI protects the lender against your default and is generally required for loans with a down payment of less than 20%.
Another feature of physician mortgages is that they generally ignore the total owed on student loans and only consider the amount of the monthly mortgage payment. A signed employment contract is often accepted as proof of income. Most traditional borrowers must provide pay stubs or two years of tax returns.
Higher loan limits are available with physician mortgages than with conventional mortgages. As much as 100% on a $1 million loan and 90% on a $2 million loan is typical.
Generally speaking, it is easier to qualify for a medical mortgage than for other home loans. Each lender has their own standards, but in general you should be able to qualify if you have:
- Proof of your medical or other degree
- A signed contract showing the amount of your current or expected future salary
- A credit score of 700 or higher
- Student loans in good standing (even if the balance will not be taken into account)
- A debt-to-income ratio of 45% or less (not including student loans)
When it comes to the costs associated with a doctor’s mortgage, the most important factor comes before a loan application is made. Since banks usually lend you more than you need or can’t even afford, the appropriate amount is up to you.
As for closing costs, which include lender fees, attorney fees, title insurance and taxes, to name a few, they average about 3% of the mortgage amount. .
Shmuel Shayowitz, president and chief loan officer at Approved Funding, cautions that just because a doctor’s mortgage is available, it’s important for new doctors to carefully consider all of their options before securing one.
“Just getting a doctor’s mortgage just because someone is a doctor can result in worse rates or terms if the person otherwise qualifies for conventional financing,” Shayowitz says.
Advantages and Disadvantages of Physician Mortgages
Like most things, physician mortgages have pros and cons. Consider them carefully before choosing between a doctor’s mortgage and an alternative.
First, consider the upside of not putting money aside versus the downside. Not only can this put you at risk of buying more home than you can afford, but it can also immediately put you “under water”, meaning you owe more on your home than you you could get if you sold it.
An average credit score of 700 can prevent you from getting your dream home before the down payment is even reached. Another factor that is often overlooked is that most physician mortgages usually have an adjustable interest rate instead of a fixed rate.
Thanks to the potential 100% financing, higher loan limits are possible, but with higher interest rates. Flexible job requirement qualifications could allow you to close your new home up to 90 days before you start. To cement your relationship with your lender, you may need to open a checking or savings account (or both) with them.
Where to get a doctor’s mortgage
Many banks and traditional lenders offer mortgages to doctors. Wrenne Financial Planning has compiled a list of these lenders, but the easiest way to find out is to call or visit the website of lenders in your area to find out if they offer this product.
Shayowitz notes that many banks have reduced these types of loans.
“A person must be very careful to do their due diligence to ensure that the benefit they seek while pursuing the doctor’s loan is, in fact, something valuable for their particular situation,” he says. .
Alternatives to Medical Loans
If you think a traditional doctor’s mortgage isn’t right for you, there are alternatives:
- Conventional loan at 20% down payment: If you qualify, a conventional 20% down mortgage may offer the best options in terms of terms, rates and fees. Student loan balances will be considered.
- Conventional loan with less than 20% down payment: Although rates and fees are higher than with a 20% loan, they may be lower than with a medical loan. Down payments between 3% and 5% are common.
- FHA loan: These loans are available to those with credit scores as low as 550, and down payments can be as low as 3.5%. They offer rates above 20% on loans and an initial mortgage insurance premium of 1.75%. There is also a separate monthly mortgage insurance premium.
- VA loan: If you qualify for VA benefits through past or current military service, they offer no down payment and no mortgage insurance requirements. Rates are about the same as FHA loans.
The bottom line
Physician mortgages provide a no-down payment option for physicians and other professionals just starting out in their careers. They ignore student loan debt and even forgive the fact that you’re just getting started and haven’t amassed a significant amount of money.
These loans are not for everyone. Lower interest rates and better terms are available for those who qualify. Consider alternatives, compare them with the terms of a doctor’s mortgage, and choose the option that best suits your plans and long-term goals.