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Physician mortgage loans: Avoid doctor-specific hurdles

Peter Warden
The Mortgage Reports editor

What exactly is a physician mortgage loan?

So-called “physician mortgage loans” have special benefits for MDs and other medical professionals.

A physician mortgage might save you money through lower fees and loan costs. Or, it might make it easier to qualify for a mortgage fresh out of medical school with a new job and student debt.

Some physicians will do well with a specialized mortgage loan, while others may find their best bet is a traditional loan program. Explore what’s available and choose the best deal for you.

Find the right loan for you (Aug 15th, 2020)

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Benefits of physician mortgage loans

Some differentiate between physicians and surgeons. But mortgage lenders don’t. When they talk about physician mortgage loan programs, they mean ones for doctors generally. Some count veterinarians, too.

These loans can deliver some very special privileges to those in the profession, including:

  1. No mortgage insurance, even if your down payment is small or zero
  2. Low fees on closing
  3. Affordable access to jumbo mortgages — usually those over $510,400
  4. Approval based on a signed employment contract rather than pay stubs
  5. Fewer hassles over student debt
  6. May be easier to get a self-employed mortgage with a shorter job history

But some mortgage insiders warn there are cons as well as pros. So read on to discover the basic facts.

Can doctors get mortgages without a two-year employment history?

One common issue doctors face when trying to get a mortgage is a lack of employment history.

Whether you’re a salaried employee or a self-employed contractor, mortgage lenders typically want to see a two-year history of steady income to qualify you for a home loan.

Doctors fresh out of medical school, or brand new to their own practice, won’t have that two-year documentation to back them up. This is usually grounds to deny someone for a mortgage.

It may be possible to get a physician mortgage loan on the strength of a contract or offer letter alone, or with as little as 6 months self-employment history.

That’s where doctor home loans come in.

Lenders are often happy to approve physicians and other medical professionals with little employment history, thanks to their high earning potential.

Thus, it may be possible to get a physician mortgage loan on the strength of a contract or offer letter alone. And self-employed doctors might be able to get a mortgage based on as little as six months‘ self-employment history.

What banks offer physician mortgage programs?

Scores of banks and credit unions across the country have physician mortgage loan programs. Some are relatively small, but a number are larger names you’ll have heard of.

Here’s a sampling of banks that offer special mortgage programs for physicians.

  • Bank of America
  • Arbor Financial Credit Union
  • Chemical Bank
  • Fairway Independent Mortgage
  • Fifth Third Bank
  • First National Bank
  • Huntington National Bank
  • KeyBank
  • Lake Michigan Credit Union
  • loanDepot
  • Regions Bank
  • US Bank
  • SunTrust Mortgage (including BB&T Bank. Now, together, Truist Bank)
  • TD Bank
  • University Federal Credit Union

You’ll see they’re in alphabetical order. And that’s because we’re not trying to rank them. But links to lender reviews are provided where available.

Qualifying for physician mortgage loans

Most physician mortgage programs are aimed at residents, attendings, fellows, and primary care physicians. But it’s up to each lender to decide who qualifies. Many include dentists and optometrists, and some include veterinarians.

It’s also up to lenders to choose the other criteria they’ll use when deciding whether to lend and the mortgage rate they’ll charge.

Many lenders will be extra-lenient on physicians — even those without a traditional two-year employment history — because their high earning potential makes lending a very safe prospect.

Indeed, some estimate that physicians default on loans at a rate of 0.2% while consumers generally do so about six times as often.

But remember, income isn’t the only thing that matters.

The golden rule still applies: The higher your credit score and down payment, and the more stable your finances, the better the deal you’re likely to be offered.

Find the right loan for you (Aug 15th, 2020)

Credit score

To get the very best rates, you’re likely to need a credit score north of 750.

But don’t worry if you don’t have that. There’s a reasonable chance of your finding a physician mortgage loan even if your score’s down at 680 or so. You’ll just pay a bit more for it.

Two other factors might be taken into account if your score’s lower than you’d like:

  1. If the rest of your application is strong — If you have a chunky down payment and very few other debts, your lender may be less worried about your score
  2. If your score’s low because you have a “thin file” — In lender speak, a “thin file” arises because you haven’t borrowed much in the past, leaving your credit record a little sparse. That’s a lot more forgivable than your having “earned” your low score through financial mismanagement

Mortgage lenders may be more indulgent when it comes to physicians. But they still expect you to meet basic credit requirements.

Down payment

It’s perfectly possible to find doctor home loans that require no down payment at all. Yes, you might need some cash for closing, though some allow you to roll those costs up within your loan.

Others are happy to lend you 80%, 90%, 95% or more of the home’s appraised value.

Avoiding mortgage insurance when your down payment is low or zero is one of the biggest advantages offered by physician mortgage loan programs.

Crucially, physicians may have access to these low- or zero-down loans without mortgage insurance.

That insurance is a real burden for non-physician borrowers with small down payments. They can end up paying hundreds of dollars every month to protect their lenders from the risk of their defaulting.

So avoiding mortgage insurance when your down payment is low or zero is one of the biggest advantages offered by physician mortgage loan programs.

Debt-to-income ratio

We’ve covered two of the three things that mortgage lenders look at most closely when deciding whether to offer you a loan and how good a deal you’re due.

The third is your debt-to-income ratio or “DTI.”

DTI is “a person’s monthly debt load as compared to their monthly gross income.”

To get the “debt” number, you add up your monthly debt payments (minimum payments on cards, installment loan payments, alimony, child support …) plus your inescapable housing costs, such as new mortgage payment, housing association fees, and property taxes.

How big a chunk of your pretax monthly income does that represent?

If it’s less than 43%, most lenders will think that’s fine. If it’s more, many borrowers have problems, though some lenders allow up to 50% for certain types of mortgages. Still, physicians may get some extra leeway.

Down payment assistance for doctors

There are thousands of down payment assistance programs (DPAs) across the country. The majority of these are designed to help lower-income or disadvantaged home buyers, so high-earning physicians may not qualify for aid.

But if you need it, you may qualify for a grant, or a low- or zero-interest loan to help with your down payment. And some loans are forgivable after you’ve spent a certain length of time in residence (resident in the home, not the hospital).

Also check out the “Nurse Next Door” program, which is open to doctors as well as nurses, medical staff, and support staff. It offers grants of up to $6,000 and down payment assistance of up to a little over $10,000.

Downsides of a physician mortgage loan

If you read around the subject of physician home loans, you’ll find some dire warnings. Whether they should bother you will depend on your personal circumstances and the lender and program you choose.

The following are some things to look out for:

Potential for higher rates

Because you’re a low-risk borrower, lenders should be able to offer you a good deal without ripping you off. But some may hope you’re better at medicine or surgery than money.

So watch out for higher rates than normal. You may find that some lenders offer seemingly low closing costs by charging you more each month over the lifetime of your loan.

And think carefully about whether or not an adjustable (or variable) mortgage rate suits you.

Many doctors benefit from these if they know they’ll be moving to a new job in a few years. And many other borrowers have saved through adjustable-rate mortgages’ (ARMs’) low rates over the last decade or so. But you need to be clear they work for you.

Deferring student loans could set you back

There are circumstances in which this is a legitimate concern. Supposing you’re fresh out of medical school and your student loans are still in their grace period.

Many physician mortgage loan programs ignore your student debt. So you could borrow big. But the only way to keep on top of your mortgage is to forbear on your student loans during your residency.

And that means you’ll be accumulating interest on those loans as well as paying interest on your mortgage. This could be expensive in the long run.

Buy now or save a bigger down payment?

If you wait until you have a 20% down payment saved, you’ll pay way less in interest over the lifetime of your mortgage. That’s indisputable.

By the same logic, if you wait until you’ve saved 100% of the purchase price, you won’t pay any interest. But what you will have paid is a pile of rent.

One consideration should play a role in your decision to save up or buy now. And that’s what’s happening to home prices in the place you want to buy.

If they’re rising sharply (and you think they’ll continue to do so), you may want to buy as soon as possible using a low-down-payment mortgage or physician mortgage program. That way, you’ll benefit from inflation.

But if home prices are stagnant or falling, you may gain little from acting quickly. You need to weigh your options. And you can afford to do that at your leisure.

Don’t forget to comparison shop

By all means, check out the mortgage lenders offering special home loans for physicians. But don’t make those lenders your only options.

Different lenders offer very different mortgage rates and deals. And the same lender can offer significantly better or worse value at different times and to borrowers with only slightly different profiles.

If you, as a physician, are buying a more expensive home than most, you stand to save even more by rate shopping.

Federal regulator the Consumer Financial Protection Bureau (CFPB) reckons, ” … failing to comparison shop for a mortgage costs the average homebuyer approximately $300 per year and many thousands of dollars over the life of the loan.”

And that’s an average. If you, as a physician, are buying a more expensive home than most, your losses stand to be even greater.

Use your loan estimates

The easy way to assess the different deals you’re offered is to make side-by-side comparisons of loan estimates from at least four different lenders. These are now standardized with the same information and layout. So it’s easy to compare them.

In particular, look at page 3, where you’ll find what you’ll have paid after five years. Here’s a sample, from the CFPB’s website:

For detailed information on how to compare mortgage offers, see: How to shop for a mortgage and compare mortgage rates

Alternatives to physician mortgage loan programs

Just because you qualify for a seemingly generous program, doesn’t automatically make it your best bet.

A ‘traditional’ mortgage, available to all, may end up being your most affordable option when rates and fees are tallied up.

Conforming and jumbo loans

If you already have your 20% down payment, you’re free to shop for any sort of mortgage.

And you may find that your solid finances and creditworthiness can get you a deal that’s as good or better than any offered by doctor home loans.

That may be especially true if you’re shopping in the jumbo loan market — for homes over the conforming loan limit of $510,400. The more you spend on the home, the more you’ll pay in interest. So you want to scrutinize your options extra carefully.

Be sure to consider all your options, research the most promising, and act decisively.

Verify your new rate (Aug 15th, 2020)

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