Becoming a doctor is no easy feat. There’s significant time commitments, studying, student loans, and so much more. It is one of the most prestigious career paths and has high-earning potential, which is why it can be frustrating when a doctor’s unique path doesn’t fit the “conventional mortgage loan” mold — namely due to student loan debt.
It’s also why some lenders have created a specific mortgage product for doctors called “physician loans.” Physician mortgage programs offer all kinds of opportunities and benefits, but above all, they make it easier for doctors to buy a home.
Physician Loan Qualifications
Borrowers should expect to gather the traditional documentation — like bank statements and employment/income information — as part of the lending process. That said, physician loans are considered a niche jumbo loan product and there are unique eligibility requirements. It’s important for borrowers to:
- Hold a select medical degree
- Licensed Medical Physicians (MDs)
- Doctors of Osteopathy (DOs)
- Doctors of Dental Medicine (DMD and DDS)
- Residents within these programs
- Be 5 years or less into residency or a medical role. Prospective buyers will be asked to provide medical school history.
- Have a job secured. From pay stubs to W2s, lenders will want to see proof of employment and income.
- Feature a preferable debt-to-income ratio. These loan products are typically less critical of student loan debt. For Fairway Independent Mortgage Corporation, the debt-to-income ratio cannot exceed 41 percent.
- Possess a high credit score. Fairway, for example, looks for a credit score of 700 or above.
Two Big Benefits
There are many advantages to physician loans. For one, there’s a very low down payment required. For Fairway, it could be as little as 3 percent down for loans up to $650,000 and 5 percent for up to $850,000. In addition, gift funds are allowed as part of down payment.
Another important benefit to highlight: There’s no Private Mortgage Insurance (PMI). A conventional loan requires borrowers to put 20 percent down in order to sidestep PMI. This is not the case for physician loans.
“For a doctor not to have mortgage insurance — with only putting down 3-5 percent — that can be very helpful,” says Jeramy Williams, Senior Loan Officer at Fairway. Not only does this save physicians money in the long run and reduce barrier to entry, it lightens the monthly financial burden.
Other Physician Loan Considerations
- Every lender is different
Not every lender offers physician loans, so borrowers may need to do a bit of research. In addition, physician loan products differ from lender to lender, including maximum loan amounts, down payment requirements and more.
- There’s also different mortgage options
Like more traditional home loans, borrowers can choose from a fixed or adjustable-rate mortgage (ARM). Fairway, for instance, offers a 10-year or 15-year fixed option, providing borrowers more security at a slightly higher interest rate than an ARM. There’s also the opportunity to select a 5-year or 7-year ARM, which means a bit more risk and lower interest rates. The best physician loan option will vary based on individual borrower situations and needs.
3 Key Questions
Some healthcare professionals may be choosing between a conventional loan or a physician home loan. Here are three ways to help narrow it down.
What is the size of the down payment?
If the medical professional only has between 3-5 percent to put down on a home, there are major benefits to securing a physician loan. On the other hand, if a borrower has a larger down payment, a conventional loan or other product offering might be more favorable.
“At the end of the day, you don’t pay a rate; you pay a payment,” says Williams. “It doesn’t help anyone if you secure a super low rate, but there’s mortgage insurance and other things that make your monthly payment $100 higher because it’s structured differently.”
He recommends “working backwards” to determine the overall payment picture. Make sure to consider all loan options and undergo a total cost analysis to work out every possible scenario, ultimately finding the one that works best
How big is a borrower’s student loan?
Conventional mortgages now consider either 1.) fully amortized student loan payments as part of the debt-ratio equation or, 2.) 1 percent of the outstanding balance on the student loan if the payment is not reflected. For example, $200,000 in student loan debt could mean $2,000 per month in student loan payment obligations.
“That can make or break some deals,” says Williams.
On the other hand, the physician mortgage program allows for student loans that are in forbearance or deferred for at least 12 months to be excluded from the liabilities.
How long does the borrower expect to stay in the home?
If only for a few years, the best option might be a physician loan in the form of a 5-year ARM.
“It could put [the borrower] in a position where they don’t have monthly mortgage insurance, and they’re making plenty of money where they can repay the loan and build their net worth as they go,” adds Williams.
It may not be easy to become a physician, but it can be easy for physicians to become homeowners. Physician mortgage programs are a unique offering that every physician-turned-borrower should know. As with any loan product and real estate transaction, there’s no one-size-fits-all situation, and it’s always best to work with experienced lenders and real estate agents who understand your unique needs.