Physician Loans: Are They A Good Mortgage Option For Doctors?

Did you know there are loan programs designed specifically with doctors in mind? Physician loans are special home loan options for medical doctors that can help them buy a house 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 this type of mortgage works and what it can do for you. It’s important to note that Rocket Mortgage® doesn’t offer physician home loans, but we do offer alternative mortgage programs to keep in mind. We’ll review those below, too.

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, like new graduates and medical residents, who are 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. They may not be able to provide proof of employment and income if they’ve just graduated or started their residency.

Physician home 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 student loan 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.

Physician loans work differently from conventional mortgages in a few ways. The main benefit of having a doctor mortgage loan is that with it, physicians are able to buy a home earlier than they would with a conventional loan.However, unlike conventional loans that can have fixed and adjustable interest rates, physician mortgages are only available as adjustable-rate mortgages (ARMs).

With an ARM, you typically pay a lower, fixed interest rate for the first few years of the loan. Even though this initial period is temporary, it can give borrowers the opportunity to pay down other debts, like student loan repayments.

A down payment of 0% – 10%, no PMI requirement and flexibility with employment and DTI make physician loans an easier and more affordable option for new medical professionals.

Let’s break down the details of how exactly a physician loan works.

Private Mortgage Insurance (PMI)

PMI exists to protect your mortgage 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 0.1% – 2% 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 didn’t make a down payment on the house.

Debt-To-Income Ratio (DTI)

Your DTI is a percentage that measures 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. Mortgage lenders check your DTI because they want to work with borrowers who have little debt and can more easily manage their monthly payments. If a borrower has a high DTI, they’re 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 accumulated medical school debt. Physician home 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.

In order to qualify for a physician loan, you’ll have to have a medical degree that meets the lender’s specific borrower requirements. Lenders may offer loan programs for medical professionals with the following degrees:

• Doctors of Osteopathic Medicine (D.O.)
• Doctor of Science (D.S.)
• Medical Doctor (M.D.)
• Doctor of Dental Medicine (D.M.D.)
• Doctor of Dental Surgery (D.D.S.)
• Doctor of Podiatric Medicine (D.P.M.)
• Doctor of Veterinary Medicine (D.V.M.)

Lenders require more than a degree to qualify borrowers for a mortgage. Borrowers typically need to provide proof of employment and income. Physician loans are flexible with these eligibility requirements 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’re 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.

Physician mortgage loans offer many exceptions to conventional mortgages that make them potentially useful to new doctors looking to buy a house. Let’s take a look at the pros and cons to help decide if a doctor loan is the right choice for you.

Pros Of Doctor Loans

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. Some of the advantages of physician loans include the following:

• No down payment or PMI requirement
• More flexible credit score and DTI qualifications
• Less stringent employment and income standards (in most cases, an employment contract will suffice)

Cons Of Doctor Loans

The opportunity to buy a house when you would otherwise be unable to may sound like an irresistible bargain – but physician home loans are not without their drawbacks. Here are some of the cons of physician loan financing:

• Only available with variable interest rates through an ARM
• Can carry higher interest rates compared to conventional loan financing
• Can only be used to finance a single-family home that’s a primary residence
• If homeowners have 0% equity in the home and the property value decreases, borrowers risk ending up with an underwater mortgage

If you’re not sure a physician loan is for you, there may be other home loan 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. FHA loans have less stringent requirements for borrowers' credit scores, DTI and down payments compared to other types of loans.

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 loansand in most places, the floor and ceiling are about $472,030 and $1,089,300, respectively. Physician home 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 qualified 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 that you’ll have to meet the requirements to qualify for a conventional loan, which include a lower DTI, higher credit score and documents to verify your employment. You may not be able to qualify for a mortgage this way until later on your medical career path, but you’d 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. Plus, you won’t have to worry about your interest rate increasing with a fixed-rate mortgage.

Keep in mind that you won’t have to pay for PMI forever. Once your home reaches 20% – 22% equity, your PMI payments will be canceled.

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.

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. You might also consider refinancing to a shorter loan, which would increase your monthly loan 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, refinancing to a conventional mortgage may be 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 mortgage payments.

Physician loans can be a great choice for new doctors looking to buy a home. However, you should explore all of yourfinancing options to make sure you’re getting the best deal on a home purchase.

Even though Rocket Mortgage doesn’t offer physician loans, we can still help get you started with the home buying process. Fill out a mortgage application today to see how you qualify.