Physicians often have a difficult time applying for a loan due to the significant amount of debt they accrued in medical school. For this reason, many mortgage lenders have started offering physician mortgage loans to help doctors achieve homeownership easier.
A physician mortgage loan is a mortgage product designed for doctors. Unlike other loan products, they have a smaller number of restrictions. For instance, one can present an offer letter as proof of income for those who have not started their practice. This type of loan is focused on one’s future earnings, making it extremely attractive to physicians who are about to graduate or finish their residency.
Mortgages tailored to doctors have grown in recent years, according to numerous mortgage lenders. For one, Bank of America reported that the dollar volume of physician mortgages it had issued between 2008 and 2017 increased ninefold.
Difference Between a Physician Mortgage Loan and a Doctor Mortgage Loan
They are the same thing and are often used interchangeably. Doctor loan is another term that is used.
Why Physicians Make Great Candidates for Mortgages
Doctors make for a lucrative and low-risk customer for banks and mortgage lenders because of their high-salary potential and job stability. According to Medscape, the average salary of physicians in 2019 was $313,000.
In addition, doctors are also less likely to default on their obligations. According to the Association of American Medical Colleges, the default rates for medical school graduates are exceedingly low, with many repaying their debt within 10 years without incurring additional debt.
Moreover, doctors have access to numerous loan forgiveness programs offered by the federal and state government. For example, California is providing up to $300,000 in debt relief for doctors who agree to accept Medicaid. Another forgiveness program is offered by the National Health Service Corps (NHSC), which offers medical students up to $120,000 in their final year of school in exchange for an approved NHSC site.
Physician Mortgage Loan Rates
Because lenders offering physician mortgages do not require PMI, they tend to make up for that lack of security by charging slightly higher interest rates. According to CNBC, physician mortgages may come with interest rates that are 0.25 to 1 point higher than mortgages for nonphysician homebuyers. So if a conventional loan has a 3.5% interest rate, expect a rate of about 3.75% for a physician mortgage.
Advantages of Physician Mortgage Loans
There are multiple advantages to physician mortgage loans, which makes them a popular option for medical practitioners across the country.
Zero down payment. Physician mortgage loans have lower down payment requirements compared to conventional loans. While the latter requires a down payment of at least 3-5%, mortgage products for doctors often require no down payment at all.
No PMI. Borrowers are often required to pay for private mortgage insurance (PMI) until they achieve equity of 20%. Physician mortgage loans do not have this requirement.
Lenient DTI. The debt to income (DTI) allows lenders to decide if an applicant is creditworthy. While traditional mortgage products would require a DTI of 43% or less, physician mortgage loans are more lenient because the lender is looking at the potential for future income.
Cap exempt. Physician mortgage loans have the advantage of being exempt from caps on how much one can borrow and the charges that are levied for going beyond this limit.
Disadvantages of Physician Mortgages
While this type of loan has heaps of advantages, it has some disadvantages, too, that one would do well to consider before signing a contract.
Variable rates. Physician mortgage lenders tend to offer variable interest rates instead of fixed rates. The rate charged on variable interest rate loans varies as market interest rates change, which means that rates can rise over time.
Higher rates. As mentioned earlier, physician mortgages tend to have higher rates. A point higher than conventional rates may not seem much at first, but it could add up significantly over time.
Limitations on property type. Most lenders will only finance a primary residence, which means that non-warrantable condos are not included. Non-warrantable condos cannot be sold to Freddie Mac or Fannie Mae, which makes them riskier to lenders.
Physician Mortgage Loan Qualifications
Physicians are preferred customers to most lenders, but they still have to possess the necessary requirements to make them eligible for a mortgage. These requirements may include the following:
Down payment. Physicians are eligible to finance 80-100% of the mortgage. Typically, one can borrow up to $750,000 with zero down payment.
Credit score. This loan may need a credit score of around 700, but some lenders are willing to agree to score as low as 680. Just keep in mind that borrowers with a higher score will always receive better rates.
DTI. Physician mortgage lenders are more lenient when it comes to DTI, but it is still advisable to keep this figure low. The ideal ratio for this type of loan is 43% or lower.
Self-employed requirements. Self-employed physicians may need to show two years’ worth of income to prove that he or she has a stable income.
Alternatives to Physician Mortgage Loans
A physician also has the option of considering other loan types, although qualifying for these traditional loans may be harder owing to the high amount of student debt carried by many physicians.
Conventional loans. This loan type is not insured or guaranteed by the government. Conventional loans are backed by private lenders, and their insurance is usually paid by the borrower. This loan will require PMI for down payments of less than 20%.
Fixed-rate mortgage. This mortgage type has a fixed interest rate for the duration of the term. This is ideal for those who plan on staying in one’s home for a long time.
Adjustable-rate mortgage. As the name implies, this type of loan has an interest rate that varies throughout the life of the loan. The initial interest rate for this loan is fixed for a set number of years then varies afterward.
FHA loan. This is a type of mortgage guaranteed by the Federal Housing Administration (FHA). FHA loans require a lower down payment and credit score than conventional loans, making them a popular option among low-to-moderate-income borrowers and first-time homebuyers.
VA loan. This is a 0% mortgage made available through the United States Department of Veterans Affairs. VA loans may be subject to an additional funding fee of 3.3%, but they typically have lower interest rates.
Things to Remember Before Taking Out a Physician Home Mortgage
Buying a home is a major financial milestone that one should not take lightly. Consider the following factors before making a decision.
Compare mortgage products. There are numerous loan options available to physicians, so it is important to do some due diligence by comparing the rates and fees of different mortgage products.
Estimate monthly payments. Most lenders offer mortgage calculators on their websites. Use these to estimate monthly payments. It is also advisable to talk to a mortgage broker who can run different scenarios.
Make sure of the purchase. Buying a home is a major financial decision, with various fees and expenses quickly adding up. These expenditures may take years to recoup, so it is advisable to decide on purchasing only if one is planning to stay for at least five years.
Get ready to take on extra costs. Interest and closing rates are not the only costs that come with buying a new home. One will also be responsible for various repairs and maintenance, so it is important to factor in these costs and prepare accordingly.
Choosing a Lender
Not all lenders have a physician mortgage loan program. One option is to start with one’s bank and ask if they have a physician mortgage program. If there is none, one may also ask his or her real estate broker for a referral. Colleagues are also a good source of referral. Once a list of prospects is made, check for reviews to see what past customers think of their loan products and service.
Getting Pre-Approved for a Physician Mortgage
A pre-approval letter tells the borrower how much he or she can loan. This is issued by a lender after evaluating the borrower’s financial history. This is an important step as it shows that one is a serious buyer.
Getting pre-approved means knowing one’s credit score and acquiring copies of one’s credit reports to see where one’s standing in terms of credit. One may also need to give one’s financial and income information to the lender like bank information and proof if income, in addition to a W-2 tax form, among others. Some lenders are easy to get pre-approval from, while others are not. It is advisable to contacting more than one lender to find the right financial partner for one’s financial situation.
Getting Quotes from Lenders
Mortgage lenders offer a lot of information, but there are general qualities that are worth looking into to make the best decision possible.
Closing costs. These are the expenses, apart from the price of the property, that buyers and sellers normally incur to complete a real estate transaction.
Interest rate. The annual cost to borrow money from a lender.
Customer service. Lenders should respond to questions and concerns promptly.
Experience. A lender who has a background in processing physician mortgages should be on top of anyone’s list.
Common Errors with Physician Mortgage Applications
Taking out any type of mortgage is a major decision, which is why it is important to look out for common pitfalls when applying.
Ignoring credit reports. Borrowers need to demonstrate to the lender that they can handle credit and pay on time. This is why it is extremely important to monitor one’s credit report before the application process.
Taking on new debts. It is important to keep one’s debt utilization and clean during the application process. New debts can slow down the application process.
Underestimating loan repayments. It is important to be aware of how much one can afford to pay. With an existing student loan, one has to pay the loan and the new mortgage as well.
Not picking the right lender. Not all lenders offer physician home mortgages, so it is a good idea to take time in finding an experienced lender who can explain the intricacies of the loan.
Make the Best Decision
Looking for a trusted physician home mortgage provider? Call (949) 284-2700 to receive expert advice from a Loanbox Mortgage consultant or visit Loanbox Mortgage for a free quote.