Purchase, Refinance Physician Mortgage Loans.

A look into physician mortgages

As a physician, you know that there are many different specialties within your profession. Cardiologists, dermatologists, surgeons, ophthalmologists, and many others all share the title of “doctor” despite the differences in their work.

The same is true of the people seeking mortgages. There are many different types of borrowers out there, including first-time buyers, second-home buyers, and refinance borrowers. One other category you may not know about is physician borrowers, which includes all the specialties above and even veterinarians and dentists.

Many lenders offer special mortgage options for physicians. These physician mortgage loans are designed to help physicians buy or build a home when their financial circumstances may not be quite the same as those of other borrowers. Because you fall under the large umbrella created by the term “doctor”, you know that many of your colleagues have significant student loans, business loans, and other debts that may interfere with their ability to secure a traditional mortgage. If that applies to you, review this guide to doctor mortgage loans.

Just what is a physician loan?

Physician mortgage loans are specialized instruments for helping doctors afford homes by waiving or bypassing some of the usual mortgage requirements. Many medical mortgage loans do not require a down payment, and unlike traditional loans that require private mortgage insurance (PMI) in that situation, physician mortgages place no such condition on the loan.

Physician loans are typically only available to practitioners who are just getting started in the profession. This is because new doctors typically have a high debt-to-income ratio (DTI) thanks to the large student loans they are likely carrying from medical school and maybe even from their undergraduate education. The high DTI and a very short employment history often make it impossible for newly-graduated doctors to get financing for a home.

Why are lenders so generous with these loans? It all boils down to income. Someone with the same DTI and the same length of employment as a doctor but with lower earnings could never meet the same kind of repayment terms for a home that a well-paid doctor could meet. Lenders understand that physicians have a high likelihood of a long career with high earnings in comparison to borrowers with more modest incomes. As a result, they are willing to exercise some flexibility.

So how do doctor mortgages work?

A number of things set doctor loans apart from conventional mortgages. These adjustments make it easier for a doctor to own a home sooner than would have been possible under traditional mortgage terms.

First, medical mortgage loans require little or no down payment, anywhere from 10% on down to none at all. While this is available on certain traditional mortgages, those loans will require PMI that adds to the cost of the loan. Physician mortgages are set up with no PMI even if the down payment ends up being 0%.

The elimination of PMI is intended to help you pay extra on your student loans so that you can quickly clear out unsecured debt, making you a much better candidate for continuing to meet the terms of your mortgage without missed or late payments. PMI can add hundreds of dollars to your monthly mortgage payments, so getting a home without a down payment and without PMI can be a big boost to your checkbook.

Another significant provision of physician loans is the greater tolerance of higher DTI. When you finished your education to become a veterinarian, dentist, or physician, you probably found yourself with big student loans. Those balances figure into the debt column of your debt-to-income ration, tipping the scales against your ability to qualify for a standard mortgage when you began looking to purchase a home.

Lenders usually require your monthly debt service to equal no more than 50% of your monthly income, but student loan payments could easily push you past that level. Lenders offering doctor mortgage loans understand that your education was more expensive than that of other borrowers, and they see how your higher income potential can help offset it.

So who qualifies? There are many different types of doctors who may be able to secure funding to purchase or refinance a home with a physician mortgage. These include all of the following hard-earned abbreviations appearing after your name:

• Medical Doctor, MD
• Medical Resident, Educational License
• Doctor of Dental Surgery, DDS
• Doctor of Dental Medicine, DMD
• Osteopathic Medicine, DO
• Optometrist, OD
• Veterinarian, DVM
• Podiatrist, DPM
• Ophthalmologist, MD
• Nurse Practitioner, NP
• Nurse Anesthetist, CRNA
• Clinical Nurse Specialist, CNS
• Chiropractor, DC
• Pharmacist, PharmD

Of course, an obstetrician or podiatrist can be just as unemployed as a lawyer or a teacher can, so the mortgage will require some type of evidence that you either have started or are about to start employment. Whether that be as an intern, a resident, or a full-time practitioner, the lender will need evidence that income has started to come in or will start soon. If work has already begun, you will need to provide a W-2 or other evidence of your earnings. If you have a source of income confirmed but haven’t actually started, documentation from your employer will suffice for verifying your earning potential.

There are also requirements about the property itself. Your medical mortgage loan typically must be for your primary residence, not a second home, rental property, or other type of residence. The generous terms of the loan are designed to make sure you have your own home despite your unusual circumstances, not to facilitate a luxurious lifestyle. Loans are also not typically eligible for use on condominiums, only on free-standing homes.

Could a physician loan be right for you?

Because it’s such a unique financing option, a physician loan should be looked at a little bit differently than traditional mortgages.

Advantages

A medical mortgage loan is a good option if you have a job but aren’t yet on the job. It is also helpful if you have a high debt-to-income ratio, and it can save you the expense of private mortgage insurance if you, like many recent professional school graduates, do not have the cash to make a down payment on a home.

Disadvantages

Doctor loans carry the disadvantage that they have a limited number of fixed rate options, usually only a 30-year mortgage. If you choose to take on an adjustable rate mortgage (ARM) that starts out with a low rate, it will increase after a few years. If you are not prepared for this uptick, it could catch you financially unprepared. In the long term, the mortgage will always have a higher rate than its traditional cousins from the same lender.

Another issue with medical mortgage loans is that it does not require you to commit any money up front. Thus you could end up on day one with your mortgage underwater, meaning you owe more on it than it’s worth. This is a serious hazard if your circumstances change and you need to sell the home soon after buying, which is a real possibility if your work takes you to a new city.

Other options for buying a home

If the terms of a physician loan are not to your liking, there are other options you can consider that make homeownership more affordable without the potential issues associated with a medical mortgage loan.

Federal Housing Administration Financing

You may know this option better by its abbreviation, FHA. This is a government agency that seeks to make it easier for families to buy a home when they cannot do so affordably through traditional methods.

FHA loans have lower, fixed interest rates and easier requirements for down payments and credit scores. These will make your payments easier to handle. Loan amounts are capped at $417,000, which sounds like a lot until you get into some of the hotter real estate markets in the country.

VA Loans

Many doctors receive their training or education by way of the military, qualifying them for a loan through the Veterans’ Administration. If you have served our country, you can go with this option. Like FHA loans, they have some flexibility on credit scores and down payments, but they also have lower maximum amounts like FHA loans.

Positioning yourself for a traditional mortgage

If the drawbacks of all these options make you feel like you should just try to go with the traditional financing route, you can. It will probably require you to rent a place for a while as you save up enough to put down 20% on your home, and you may not be able to buy as large of a place.

On the positive side, though, you’ll be able to pay down student loans as you live a little more cheaply in an apartment or a smaller home. Many recent graduates have no problem with adding a couple more years of the lifestyle they experienced during college and medical school, allowing them to work aggressively on saving for a down payment and attacking those student loans.

Making the call