Physician Loans: Are They A Good Mortgage Option For Doctors?
Sidney Richardson8-minute read
November 24, 2020
Did you know there are loan programs designed specifically with doctors in mind? Physician loans are special loan programs for doctors that can help them buy a home before they would otherwise be able to.
Want to find out if a physician loan is right for you? Read on to learn more about how these mortgages work and what they can do for you. It’s important to note that Rocket Mortgage® doesn’t offer physician loans but we do offer alternatives that are great options. We’ll review those below, too.
What Is A Physician Loan?
A physician loan or “doctor loan” is a mortgage specifically for medical professionals that usually doesn’t require a down payment. With other loan types, lenders often want borrowers to pay private mortgage insurance (PMI) if they’re making a down payment of less than 20%. Physician loans make it possible to skip paying for both a down payment and PMI if you happen to be a doctor.
Physician loans are meant for new medical professionals just entering the field. Doctors are often at a disadvantage when applying for a regular mortgage early in their career because they usually have a large debt-to-income ratio (DTI) after medical school and may not be able to provide proof of employment and income if they have just graduated or started their residency.
Physician loans take all of this into account and make some special allowances for the unique circumstances of a medical career. It may seem unusual for a lender to allow borrowers to take on a mortgage when they have a large amount of debt and are just starting out in their careers, but they have doctors’ career trajectories in mind.
Despite lacking significant income early on due to medical school debt, doctors have the potential to earn more money in the future and are less likely to default on their loans. With this in mind, lenders are more willing to make a few compromises.
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How Physician Loans Work
Physician loans work differently from conventional mortgages in a few ways. The main benefit of having a doctor loan is that with it, physicians are able to buy a home earlier than they would with a conventional mortgage.
A down payment of 0% – 10%, no PMI and flexibility with employment and DTI make physician loans an easier and more affordable option for new medical professionals - but keep in mind these types of loans usually don’t offer a fixed interest rate.
Let’s break down the details of how exactly everything works.
PMI exists to protect your lender if you stop making payments on a loan. Usually, if you make a down payment of less than 20% when buying a home, your lender will require that you pay PMI.
It’s based on insurance rates, so it varies, but PMI typically costs 0.5% – 1% of your loan amount per year. That could be hundreds of dollars extra on a monthly payment, depending on the size of the loan.
Physician loans aim to give new doctors the opportunity to focus on paying off their medical school debt, so they don’t require borrowers to pay for PMI at all, even if they made no down payment.
DTI, or debt-to-income ratio, is a percentage measure of how much money you spend on debt versus how much money you have coming in.
For most conventional loans, it’s required that your DTI is 50% or lower. Lenders check borrowers’ DTI because they want to work with people who have little debt and can more easily manage their monthly payments. If a borrower has a high DTI, they are considered risky to the lender.
For a new doctor, it may be difficult or even impossible to achieve a DTI of 50% or lower due to the thousands of dollars in debt they have likely accrued from medical school. Physician loans take this into account and are more relaxed with DTI restrictions.
Credit card debt, car loans and other expenses are still examined, but lenders expect recent medical school graduates to have debt, so a higher DTI is not always a dealbreaker.
All physician loan programs are available to doctors with the following degrees:
Some lenders also offer loan programs for medical professionals such as dentists, orthodontists and veterinarians with these degrees as well:
Lenders require more than a degree to qualify borrowers for a mortgage, however. Borrowers typically need to provide proof of employment and income. Physician loans are flexible with these qualifications because they understand new doctors may be working in an internship, residency or fellowship. Physician loan lenders will usually accept a contract of employment to verify a doctor’s income if they do not have pay stubs or W-2s that reflect their current position.
Physician loans can only be used to buy or refinance a primary residence. This means you have to live at the home you are buying or refinancing for a majority of the year. You cannot use a doctor loan to finance a second home or investment property. Lenders also typically won’t allow physician loan borrowers to finance a condo.
Are Physician Loans A Good Idea?
Physician mortgage loans offer many exceptions to conventional mortgages that make them potentially useful to new doctors looking to buy a home. Let’s take a look at the pros and cons to help decide if a doctor loan is the right choice for you.
Why You Might Want A Doctor Loan
If you’re a new doctor who can’t afford or qualify for a conventional mortgage, you may still be able to buy a house with a physician mortgage loan. Remember, you don’t have to pay for PMI or a down payment, and the DTI requirements are flexible.
You also don’t need the typical proof of employment and income required for most conventional mortgages; an employment contract will suffice.
The Drawbacks Of The Doctor Loan
The opportunity to buy a house when you would otherwise be unable to may sound like an irresistible bargain – but physician loans are not without their drawbacks.
First, doctor loans are very rarely fixed-rate mortgages. Typically, physician loans will be adjustable rate mortgages (ARMs). With an ARM, you typically pay a lower, fixed interest rate for the first few years of the loan. After that initial period, however, your interest rate will fluctuate and often increase. Since borrowers aren’t always prepared for higher rates, ARMs carry more risk than fixed-rate mortgages.
Besides changing interest rates, doctor loans also sometimes have slightly higher interest rates. Higher interest rates add up over time, and physician loans often end up being more expensive than a conventional mortgage in the long run, despite being appealing upfront.
You may also run the risk of ending up with an underwater mortgage. When you don’t put a down payment on your house, you start with 0% equity. If your property value decreases or you can’t afford your payments while you still owe the original loan balance, you could end up with a home loan with a higher principal than the home is worth.
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Your Physician Loan Alternatives
If you’re not sure a physician loan is for you, there may be other options. While not all alternatives will be available right away to those starting a medical career, those that are may save you money in the long run and better suit your needs.
Apply For An FHA Loan
An FHA loan is a loan backed by the government and insured by the Federal Housing Administration, unlike conventional loans which are not backed by a government agency. These mortgages have requirements that are a little less stringent about your credit score and down payment than conventional mortgages, so they’re a good option if you can’t qualify for a conventional mortgage.
While FHA loans can be a great option, there are restrictions on how you may use them. Whether you choose an FHA or physician loan depends on the value of the property you’re buying. There are lending limits with FHA loans and in most places, you can only get up to $417,000. Physician loans will usually lend you more depending on where you’re at in your medical career.
If you’re looking for a fixed-rate mortgage with less strict requirements, though, an FHA loan might be a great choice. If you want to avoid ARMs but don’t qualify for a conventional mortgage, an FHA loan is the way to go.
Apply For A VA Loan
VA loans are loans offered to qualified veterans, active service members and their spouses. These loans are backed by the Department of Veterans Affairs and allow past or present service members to qualify for a less expensive mortgage, even if their credit isn’t the best.
With VA loans, you don’t have to make a down payment or pay PMI. VA loans do have a lower lending limit than physician loans, but they also tend to have lower interest rates. You have to meet the requirements for time served in the Armed Forces to qualify, but if you happen to, a VA loan can be a great choice.
Save For A 20% Down Payment
If you don’t mind waiting until you’ve paid off some debt and are able to save money, you can make a down payment of 20% on a conventional loan. By putting 20% down, you will be able to avoid paying PMI and start with some equity in your home.
Keep in mind, you will have to meet the requirements to qualify for a conventional loan, which include a lower DTI and pay stubs or W-2s to verify your employment. You may not be able to qualify for a mortgage this way until a little later on your medical career path, but you would be able to take advantage of potentially lower rates and the bonus of starting with equity already built in your home.
Get A Conventional Loan With PMI
If you qualify for a conventional loan but can’t afford to put the full 20% down, you can still make as large a down payment as you are able to and pay for PMI. Any size down payment is helpful because it reduces the amount of interest you will ultimately have to pay on your loan.
While you will have to deal with the extra cost that PMI adds to your monthly payment, PMI allows you to get a mortgage faster at a rate that is lower than what you’d pay with a physician loan – and you don’t have to worry about your interest rate increasing. You also won’t have to pay for PMI forever. Once your home reaches 20% – 22% equity, your PMI payments will be cancelled.
Refinance From An Existing Physician Loan
If you already have a physician loan, refinancing can be a viable option. If you’ve paid off some debt, built equity and increased your income, you may be in a great position to refinance into a conventional loan and save.
If your physician loan is an ARM, you could also consider switching to a fixed-rate loan if you’re able to get a lower rate. Also consider refinancing to a shorter loan, which would increase your monthly payments but allow you to pay off your home much faster and avoid accruing too much additional interest.
If you’ve built equity in your home and have more money than you started your loan with, keep in mind that refinancing to a conventional mortgage is your best bet. Refinancing into a new physician loan may get you a better deal than you had before, but conventional mortgages can offer more security and potentially less interest at this stage of your home payments.
Find The Right Alternative For You
Physician loans can be a great choice for new doctors looking to buy a home, but you should always explore all your options to make sure you’re getting the best deal.
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