Understanding Physician Loans: Mortgages for Medical Professionals
Medical professionals often face unique challenges when it comes to obtaining a mortgage. With a high debt-to-income ratio and limited employment history, new doctors can find it challenging to meet the strict requirements of traditional mortgages. That's where physician loans come in. Physician loans, also called doctor loans, are mortgages specifically designed for medical professionals. These loans often don't require a downpayment and don't have private mortgage insurance (PMI) requirements, making it easier for doctors to buy a home earlier in their careers. We will discuss how physician loans work, borrower qualifications, and eligibility requirements for these unique loans.
What Is A Physician Loan?
Physician loans, or doctor loans, require no down payment and are specifically for medical professionals. Other types of loans often require borrowers with less than 20% down payments to pay private mortgage insurance (PMI). If you are a doctor, you can avoid paying either a down payment or PMI with physician loans.
Physician loans are intended for medical professionals who are just entering the field. If they just graduated or started residency, they may need more evidence of employment and income. A doctor's debt-to-income ratio (DTI) is usually high after medical school, making them less likely to qualify when applying for a regular mortgage early in their career.
A physician home loan considers all of this. It makes some special allowances for the unique circumstances of a medical career. It may seem odd for a lender to qualify borrowers to take on a mortgage when they have substantial student loans and are just starting their careers. Still, they take into consideration doctors' career paths.
Medical school debt prevents doctors from earning significant income early on. Still, they are likely to earn more money and are less likely to default. Therefore, lenders are more willing to make a few compromises.
How Physician Loans Work
A physician loan differs from a conventional mortgage in a few ways. The use of doctor loans enables physicians to buy a home much earlier than they would be able to if they were to buy a home with a conventional mortgage.
A physician loan is a simpler and more affordable option for new medical professionals because it requires a low down payment, does not require PMI, and has more flexibility concerning employment and debt-to-income ratios. Remember that these types of loans usually cannot offer fixed interest rates.
Here's how everything works in detail.
If you stop paying your mortgage, private mortgage insurance protects your lender. If you have a down payment which is less than 20%, your lender usually requires you to pay PMI when buying a home.
PMI depends on insurance rates, so it varies, but it typically costs between 0.1 and 2% of your loan amount each year. Depending on the loan's size, that could add hundreds of dollars to the monthly payment.
Despite making no down payment, physician loans will not require borrowers to pay PMI, so new doctors can concentrate on paying off their medical school debt.
A debt-to-income ratio measures how much money you spend on debt compared to your income.
Conventional loans require a DTI of 50% or lower. Lenders check your DTI because they prefer borrowers with little debt and can easily manage their monthly payments. A high DTI may indicate that a borrower is a risky borrower.
The debt accumulated during medical school may make it difficult for a new physician to achieve a DTI of 50% or lower. DTI restrictions for physician home loans are more relaxed due to this consideration.
Assessing credit card debt, car loans, and other expenses is still necessary. However, lenders expect recent medical school graduates to have financial obligations, which means a higher DTI is only sometimes a dealbreaker.
Doctors with the following degrees are eligible for all physician loan programs:
Loan programs are also available for dentists, orthodontists, and veterinarians with the following degrees:
Mortgage lenders require more than a degree to qualify borrowers. Most lenders require proof of employment and income from borrowers. Because they recognize that new doctors may be completing internships, residencies, or fellowships, physician loans are flexible with these qualifications. Suppose a physician does not have pay stubs or W-2s reflecting their current employment. In that case, the lender usually accepts an employment contract as proof of income.
Physician loans are only available for primary residence purchases or refinance. In other words, you must live in the home you purchase or refinance for most of the year. It is not possible to finance a second home or investment property with a doctor's loan. Additionally, lenders typically do not finance condos for physician loan borrowers.
Doctor Loan Eligibility
Many doctors (physicians and dentists) know how beneficial these loans are. However, many other professionals may need to realize they qualify too.
Who Qualifies for a Physician Loan?
Physician Mortgage Loans are available to other high-income professionals, including:
- Certified Registered Nurse Anesthetists (CRNA)
- Advanced Practice Clinicians (PAs, NPs)
How Does a Doctor Mortgage Work When You Have Student Loans?
Under physician mortgage loan programs, student loans in Income Dependent Repayment (IDR) programs (IBR, PAYE, REPAYE, etc.) receive special treatment.
Josh Mettle of Neo Home Loans explains:
Rather than defaulting to a fully amortizing payment (as in a conventional loan), the mortgage underwriter will allow the lower income-driven repayment. Student loans with deferred payments for at least 12 months from the closing date also do not qualify.
How Much Credit Score Do You Need for a Doctor Loan?
For a physician loan, you'll need a FICO score of 720-740. If you have 6-12 months of cash reserves, some of our recommended mortgage lenders will lend down to a 680 credit score.
Buying a house is probably not a good idea if you have a credit score below 720. Don't miss any payments, don't borrow any more money, and pay off your credit cards (don't close them, as they can lower your score). Renting for a year is not a problem (and it is often a good idea if you are moving to a new area or changing jobs anyway). Most of the time, this will clean up your credit.
Is A Doctor's Loan A Good Idea?
Although doctor mortgages are not necessarily bad, most people should at least save up for a down payment and delay that purchase, particularly if they are looking to buy a house right after residency (or worse, when they are in residency for a short period).
We often have much better uses for our money than a down payment after deferring gratification for 10-15 years, such as maxing out our retirement accounts or paying off our student loans. Then why would someone want to take advantage of these loans? In most cases, they are in a hurry to buy a house.
Physician Loans: Pros and Cons
Physician mortgage loans have the following advantages:
- No Private Mortgage Insurance (PMI): There is no PMI requirement, even with a down payment of 0-10%.
- Little to No Down Payment: Based on the location of the property, your credit score, and the loan amount, you may qualify for 90-100% financing.
- Higher Loan Amounts Allowed: Physician mortgages can borrow more than conventional mortgages. For a $1 million loan amount, you can expect to receive 95-100%, and for a $2 million loan amount, you can expect to receive 90%.
- Special Treatment of Student Loans: You can still buy a home even if you owe hundreds of thousands of dollars on your student loans.
- Close on Your Home Before You Begin Working: It's unnecessary to wait until you start working to qualify for a mortgage. Most lenders can close your loan 30 to 90 days before you start working. Some lenders don't even require a contract in hand.
The following are some disadvantages of using a physician mortgage loan:
- You Don't Have a Down Payment: If you do not have savings for a down payment, you need to ask yourself if now is the right time to buy a home. It is best to buy a house when your personal and professional lives are stable. Take your time with this purchase.
- Buying More House Than You Should: Borrowing a lot of money is sometimes the right financial move.
- You Already Have a Ton of Debt: Your net worth may already be negative $200,000 or $300,000. Are you willing to add more debt to that burden?
Taking out a Physician Loan for an Investment Property
Using a Doctor Mortgage for an investment property is an unacceptable risk. You should put down 25-35% in cash to ensure your investment property has a positive cash flow. Some situations may work out, such as when you house hack by buying a duplex, staying on just one side and renting out the other, or if you find an incredible deal on a property that will cash flow despite a small down payment. In that case, you don't need a physician's mortgage. You will still need to live in the property for at least a year or two before turning it into an investment property.
Your Physician Loan Alternatives
Other home loan options may be available if you need to figure out if a physician loan is right for your needs. Those starting a medical career will only have access to some alternatives, but those that can save them money in the future and better suit their needs may be available.
Apply For An FHA Loan
Suppose you don't qualify for a conventional mortgage. These mortgages are a good option since they have less stringent credit scores and down payment requirements. It is important to note that FHA loans, as opposed to conventional loans, are backed by the Federal Housing Administration and are guaranteed by it.
FHA loans can be great options, but they do come with restrictions. Choosing a physician loan or an FHA loan depends on your buying property value. In most places, FHA loans have floor and ceiling lending limits of $420,680 and $970,800, respectively. Your physician home loan will lend you more based on your level of experience.
If you are considering a loan option, an FHA loan could be a wise decision, especially if you're aiming for a fixed-rate mortgage with fewer requirements. You can apply for an FHA loan to avoid ARMs but do not qualify for a conventional mortgage.
Apply For A VA Loan
VA loans are offered to qualified veterans, active duty military personnel, and their spouses. Even if they don't have perfect credit, past or present service members who qualify for these mortgages can get a cheaper mortgage due to the backing of the Department of Veterans Affairs.
Taking out a VA loan can be a great idea if you meet the requirements for time served in the military. Despite the fact that VA loans have a lower loan limit than physician loans, they also tend to have lower interest rates than physician loans. VA loans do not require private mortgage insurance or a down payment.
Save For A 20% Down Payment
For conventional loans to be approved, you need to have paid off some debt and have started saving money to make a down payment of 20%. Putting 20% down will allow you to avoid PMI and begin with some equity.
You must meet the requirements for a conventional loan, such as a lower DTI and pay stubs or W-2s showing proof of employment. Even though you may only qualify for a mortgage this way later in your medical career, you could take advantage of lower mortgage rates and start with equity in your home.
Get A Conventional Loan With PMI
You can make a larger down payment than you need to qualify for a conventional loan. However, you will still need to pay for a PMI or private mortgage insurance if you do not have the funds to put 20% down. A down payment of any size reduces the total interest you will ultimately pay.
Even though you have to pay PMI on your mortgage, it allows you to get a mortgage faster with a lower interest rate than you would pay if you took out a physician loan due to the extra costs involved in the process. With a fixed interest rate, you don't have to worry about your interest rate increases. Additionally, you won't have to pay PMI forever. You will no longer have to pay PMI once your house reaches 20 - 22% equity.
Refinance From An Existing Physician Loan
You can refinance your physician loan if you already have one. You can save money by refinancing into a conventional loan if you've paid off some debt, built equity, and increased your income.
If you receive a lower interest rate on your physician loan than you currently have, consider switching to a fixed-rate loan. You will pay more monthly if you refinance to a shorter loan but will pay off your home much sooner if you refinance to a shorter loan.
There is always the best way to refinance a home when you have built equity in your home, and this is the best way to do so. Conventional mortgages offer more security and less interest than physician loans at this stage of your home payments.
The Bottom Line
Physician loans allow medical professionals to skip a down payment and private mortgage insurance, making home ownership more affordable. It considers the unique circumstances of medical professionals, like their high student loan debts and limited evidence of employment or income at the beginning of their careers. Besides doctors, high-income professionals such as dentists, veterinarians, and accountants can also apply for physician loans. Borrowers typically need a credit score between 720 and 740 to qualify for physician loans.
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