BENEFITS OF WORKING WITH A PHYSICIAN MORTGAGE LENDER
Training to become a doctor takes a long time — literally a decade or more. As a result, doctors often start their careers later than their non-doctor friends, and often have a high total debt load from medical school. These specific circumstances present unique challenges to qualifying for a traditional mortgage.
A physician home loan gives doctors an opportunity to buy a home far earlier in their career than they would otherwise consider possible.
Why Doctors Have A Special Mortgage Opportunity
Little in savings. Young doctors or those in residency typically put all their extra funds toward medical school. That makes it difficult to cobble together the traditional 20% down payment on a home. A physician mortgage, also known as a doctor mortgage loan, allows qualified individuals to put down less than 10% — or even no money down for a home.
Offerings like these can make a huge difference for borrowers with little cash available.
For example, at First Midwest Bank, Residential Lender Ken Crowder noted: “We offer a zero money down doctor mortgage loan with no private mortgage insurance. Additionally, for those in residency, we only require two months of reserves in savings.”1
Limited work history. Young doctors and residents have been in medical school, not earning a salary. Lenders typically want to see two years of employment, plus current employment before they offer a mortgage. A doctor mortgage loan has relaxed employment requirements. Often a residency contract — or other proof of future employment — can stand in for current employment. And there is usually no expectation of two years of previous work experience.
Substantial debt. Medical school often leaves graduates with $100,000s in student loans. And when lenders consider an applicant, they typically want to see a low debt to income ratio. As a result, student debt disqualifies many young doctors for a regular mortgage. A physician mortgage loan relaxes these requirements and takes a more holistic view of the borrower’s overall ability to repay the loans. For example, the Doctor Loan Program at First Midwest does not consider student loans that are deferred at least 12 months as part of the applicant’s total debt.
Reliable long-term income. This is the heart of the matter. Banks that offer a physician mortgage loan understand that young doctors have strong future earnings potential. They are willing to offer mortgages with low down payments, no PMI, and adjusted debt ratio and employment requirements. These adjustments are made because many young doctors have a strong future earnings potential.
How to Identify the Best Physician Mortgage Loans
The best way to find out if a doctor mortgage loan is right for you is to talk with a lender to get the details. Like any mortgage, you want to shop on rates, closing costs and other factors that are important to you. In this respect, a doctor mortgage loan is no different than a regular mortgage. If you do your due diligence and talk to several lenders, you will be able to understand what is available to you, and which lender offers terms that best fit your specific situation.
There are also other considerations. “Borrowers should know whether the loan will be sold to another lender for servicing,” said Ken Crowder, a Residential Lender at First Midwest Bank. “At First Midwest Bank, our doctor mortgage loans are part of our portfolio and stay with us. That means we set the criteria, which makes the process smoother from start to finish, and allows us to offer highly competitive rates and programs.”
Also, physician mortgage loans are typically only for primary residences. If you have your eye on a vacation home or an investment property, you are unlikely to qualify for a physician mortgage loan. That said, there are occasionally exceptions if you are looking to buy a multi-unit property and live in one of the units yourself. In this case, some lenders will allow you to take out a doctor mortgage loan.
Who Qualifies for a Physician Loan?
This is up to the lender. Physician mortgage lenders typically make their product available to those with M.D. or D.O. degrees. Some also lend to those with a podiatry, optometry, or another specialty medical degree. Some lenders include dentists and orthodontists as eligible for physician loans, and some even include veterinarians.
Lenders also often include a requirement about how recently the doctor has graduated medical school. In some cases, the physician loans are only available to those starting out as a resident, in other cases the physician mortgages are also available to new attending doctors — in other words, doctors who have completed their residency within the past several years.
For example, First Midwest Bank has a Doctor Loan Program for those who have a M.D., D.O., D.D.S., D.M.D., D.P.M. or D.V.M. degree. The program is split into two categories: One for new doctors, who are in a residency program, and one for established doctors who are licensed and have practiced for at least two years. As with many of these programs, to get more details, you need to talk with a lender.
Physician Mortgage Loans and Your Credit Score
The other aspect of qualifying for a physician mortgage loan is your credit score. Doctor mortgages are created for borrowers who have relatively limited assets at the time the loan is taken out. As a result, banks typically require good to great credit. After all, a borrower’s future ability to repay isn’t just based on their income – banks also want to see that an applicant has a history of paying their bills and debts on time.
While the specific credit requirements vary by bank, credit scores in the 700s or higher are typically required for a physician mortgage loan. It pays to shop around and see what different banks expect. There are also other low down payment programs that may be a better fit, such as a VA mortgage loan for veterans or an FHA mortgage loan for first time homebuyers.
Do Physician Loans require PMI?
Generally speaking, physician mortgage loans do not require private mortgage insurance, also known as PMI. This is a substantive benefit; many non-doctor low down payment options do require the borrower to take out separate private mortgage insurance (PMI) until they reach 20% equity in their home. This additional insurance requirement can add hundreds of dollars to a borrower’s monthly payment.
With almost all physician mortgage loans, the PMI requirement is waived. This can save borrowers thousands of dollars over the life of the loan.
Are Physician Home Loans Worth It?
While this question really depends on your individual circumstances, there are some notable advantages to a physician home loan. First, doctors are able to take out a low down payment mortgage — often with no down payment all — at competitive rates. Further, physician home loans almost always waive the PMI requirement, saving borrowers additional money.
Second, because these loans are expressly for doctors, debt and employment requirements are tailored to the shape of their career: the debt ratio calculation is relaxed or adjusted to reflect the reality of student loans for most young doctors. The employment requirement is adjusted. Doctors who have just graduated medical school are not required to demonstrate two years of previous employment — just to provide proof of future or imminent employment. Banks realize the income potential of young doctors.
A physician home loan gives doctors a chance to buy a home far earlier in their career than they would otherwise consider possible.
That said, there are two things to be aware of. These issues are typical of all low down payment mortgages, not just doctor loans. First, whenever you put little or no money down on a mortgage, you end up paying substantially more over the life of the loan in interest costs, compared to a borrower who put down the traditional 20%. However, doctors who end up staying in the same home for decades can often refinance or take advantage of other opportunities to lower their interest costs as they advance in their career.
The second issue with putting no money down, or little money down, is that you may be at risk of going underwater on your mortgage. This means that you owe more on your mortgage than your house is worth, simply because of a downward shift in the overall real estate market.
For doctors who are planning to live in their home for only a few years, this could be a risk — selling a home worth less than you owe means you would have to pay out of pocket to complete the sale. For doctors who plan on living in their home for a substantial period of time, this risk is lower. Regular monthly payments will increase your home equity, which means you are less likely to go underwater.
In short, a physician home loan gives doctors substantial benefits in accessing money to buy a home, since the loan is tailored specifically to their needs. However, a doctor loan is a low down payment mortgage, which might not be right for each situation. While a physician home loan may be appealing, home buyers should always weigh all their options before deciding on the loan right for them.