Doctors straight out of medical school are bound to have sizable student loan debt and minimal savings for a home down payment. Despite excellent income potential, it can still be tough for them to qualify for a traditional mortgage program. Some lenders take all of these factors into consideration by offering mortgages specifically for physicians.
Learn more about the features of physical loans, how to qualify and potential drawbacks.
What Are Physician Mortgage Loans?
Physician mortgage loans cater to newly graduated doctors or medical students. They are a type of nonconforming loan, meaning they are not government-backed loans like FHA loans or conventional loans that are bound by Fannie Mae or Freddie Mac standards.
Physician mortgage loans often allow for 100% financing (or close to it), and they allow the borrower to close on a new home up to 90 days before a job begins, says Shawn Fehily, regional manager of Novus Home Mortgage in Dallas. “Typically, lenders just need to see an offer of employment to determine income,” he says.
The other key feature of physician loans is that the formula lenders use to figure out debt-to-income ratio does not include student loans. “An applicant’s debt-to-income ratio measures how much of your monthly income goes to paying debt, and lenders use this ratio to gauge your ability to pay your debts (including a new mortgage),” says Eric Mangold, certified wealth strategist and founder of Argosy Wealth Management in New Jersey, who specializes in helping health care professionals with their finances. “For new medical school graduates or medical residents, this ratio can be very high if there is a lot of medical school debt or other student loans.”
For conventional loans, applicants usually need to have a 45% DTI, meaning that their debt payments require 45% or less of their income.
And when a new doctor first enters the field, their income may not be that high. “The physician loan tries to take these factors into consideration to help make it a bit easier for a new physician to buy a home,” says Mangold.
[Read: Best Mortgage Lenders]
Who Qualifies for Physician Mortgage Loans?
Lender requirements for private, nonconforming loans vary, but the main requirement for physician loans is holding a medical degree, and/or being employed or having an employment contract offer as a physician.
Lenders typically specify which degrees can qualify someone for a physician loan, but they may include some or all of the following:
— Medical Doctor (MD)
— Doctor of Osteopathy (DO)
— Doctor of Dental Surgery (DDS)
— Doctor of Dental Medicine (DMD)
— Doctor of Pharmacy (PharmD)
— Doctor of Veterinary Medicine (DVM)
As for employment, physician home loans are usually open to practicing physicians; medical fellows and residents; and medical students and medical doctors who have contracts to begin working within 90 days of closing.
“The lender views the ability for the physician to repay the loan over the long term, meaning that they know that most physicians will begin to earn a higher income as their career progresses, making it easier for them to repay the loan,” says Mangold.
In addition, lenders consider many of the same factors as they do for other types of mortgages, including credit score, debt-to-income ratio (though student loans can be left out), cash reserves and other assets. Depending on the lender, a strong credit score and enough cash reserves to cover a few months of principal, interest, taxes, and insurance may be required.
[Read: How to Get a Mortgage With No Down Payment. ]
Pros and Cons of Physician Loans
Pros
— May allow a physician to buy a home sooner. Large sums of student loan debt can be left out of DTI calculations so as not to prevent a new physician from getting approved for a loan.
— Smaller or no down payment. Most physician mortgage lenders understand that borrowers fresh out of medical school will not have had time to save up for a down payment. Loans might require no money down, depending on the lender and size of the loan.
— No private mortgage insurance. Even though these loans require little or no money down, most lenders do not charge PMI because they are confident in the borrowing physician’s ability to pay.
Cons
— Can be risky. Leaving student loans out of the equation can be a big deal for a borrower who doesn’t have good control over their cash flow or other spending habits, leading to even more debt struggles.
— Higher interest rate and sometimes an adjustable rate. Because you’re not paying PMI and there’s a lower down payment, interest rates on physician loans may not be as competitive as other types of loans. In addition, some loans may have an adjustable rate, which carry the risk of becoming more expensive after the initial fixed-rate period.
— There is limited availability. According to Fehily, physician loans may be somewhat scarce. “Only a handful of lenders specialize in the doctor program,” he says.
— You will likely have to defer student loans. Some lenders require student loans to be put in deferment in order to not include them in the DTI calculation. Loans that are deferred may still continue to accrue interest, ultimately costing you more.
[Read: 15 Companies That Help Pay Off Student Loans]
What Lenders Offer Physician Loans?
If you’re looking for physician mortgages, you’ll have fewer options than if you went the traditional home loan route. Note that while there are some banks and lenders that offer this product, some may simply market their private loans as “medical” or “physician” loans. Be mindful to look for the key features that benefit physicians: low down payment, no PMI, and flexibility around DTI and student loans.
Here are a few lenders currently offering physician mortgage loans.
Rate
Rate offers a loan program for practicing doctors (including DOs), dentists, dental surgeons and veterinarians; those within 10 years of completing their original residency or fellowship; newly licensed medical residents who are currently employed, in residency or fellowship; or newly licensed medical students who are about to begin new employment/residency within 60 days of closing. Borrowers must put down 5%, plus have cash reserves to cover six months of mortgage payments.
First Horizon
First Horizon offers up to 100% financing for loans up to $1.5 million if you are an M.D., D.O., oral and maxillofacial surgeon, or a doctor of podiatric medicine. To qualify, you must have a minimum 670 FICO score and be a First Horizon Bank deposit account holder and enroll in autopay.
Bank of America
Bank of America’s physician loans are aimed at residents and fellows who have job commitments within 90 days of closing, and student debt will not be counted in DTI. The more you borrow, the higher the down payment requirement: (3% down on mortgages up to $850,000; 5% on mortgages up to $1 million; and so on).
TD Bank Medical Professional Mortgage
To qualify for TD Bank’s Medical Professional mortgage, you must be a practicing physician (MD, DO, DPM), dentist (DDS, DMD) or oral surgeon; licensed medical/dental resident or fellow; or a self-employed doctor or dentist for at least two years. Loans up to $1 million require no money down.
Fifth Third Bank
Physician mortgage loans from Fifth Third Bank are for new and established physicians, and student loan payments must be in a deferment or forbearance period to be excluded from the DTI calculation. Fixed and adjustable rate mortgages are available.
How to Apply for a Physician Mortgage Loan
The application for a physician mortgage loan can vary slightly depending on the lender, but compared to other home loans, there shouldn’t be much variation, says Fehily. “There’s really no difference other than proving you’re a doctor,” says Fehily. Here’s what you can expect.
1. Choose a lender that specializes in this type of loan program and also has a solid reputation.
2. Work with a loan specialist who can answer your questions and guide the process as needed.
3. Start your application online, in person or over the phone, depending on the lender.
4. Be prepared to submit an employment contract or other employer verification documents.
5. Answer other application questions regarding your income and assets, providing documentation as needed.
6. Wait for approval.
7. If approved, look carefully at the terms of the loan offer to make sure you want to proceed.
Can You Refinance a Physician Mortgage Loan?
A physician loan can help fast-track your path to homeownership, but it may not have the most competitive interest rate. In some cases, you may have an adjustable rate mortgage and once the fixed period is over, your payment could increase. Luckily, you always have the option to refinance your physician loan.
“Most loans are able to refinance within three to six months,” says Fehily. However, be sure to consider if there are any prepayment penalties, and factor in closing costs to see if it makes financial sense to refinance, he adds.
Also, don’t forget that moving to a conventional or government loan will mean you’ll need to include any remaining student loan debt as part of the DTI ratio. If you haven’t paid your loans down significantly by the time you try to refinance, it could still be difficult to qualify.
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