Becoming a physician involves sacrifice.
There are many hidden costs, personal and otherwise, necessary to get that medical degree.
By the end of that long journey, most new doctors have a considerable amount of academic debt and not much in the way of savings. Typically, a person with this kind of financial portfolio would find it challenging to secure any kind of mortgage.
Luckily, major banks and financial institutions have created a mortgage designed specifically for physicians and their unique situation.
The following is a Physician Loan Guide to help you understand the qualifications for this specialty product and how you can get pre-approval for your first home as a new doctor.
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Physician Loan Guide Part 1: What Is A Physician Loan?
A physician mortgage loan or physician loan is an exceptional product available to doctors with an M.D. (Medicine Degree) or D.O. (Doctor of Osteopathic).
Some banks also offer physician loans to those with D.P.M. degrees or dentists with D.D.S. (Doctor of Dental Surgery) or D.M.D. (Doctor of Medicine in Dentistry). Some lenders even cater to veterinarians and other doctors.
When comparing physician loans to standard mortgages, there are many similarities.
Your monthly payment calculation is still based on the same factors:
- The principal amount owed (i.e., how much of the original price remains to be paid)
- Interest (depending on the rate you agreed on)
- The length of the loan (a.k.a., the term)
- Property taxes
- Homeowners insurance / PMI (Private Mortgage Insurance)
Depending on the lender, certain other factors can come into play including:
- Your credit score
- The zip code of the property
- Homeowners Association fees (if applicable in your area)
Your closing costs will generally be the same for either type of loan.
But physicians have an unusually high debt-to-income ratio, especially when they have just completed their medical training.
At the same time, new doctors are also less likely to have much in the way of savings. Under these circumstances, standard mortgages are much less likely to be approved.
However, lenders have analyzed the income trends of doctors and realized that they have an income potential that allows them to qualify for this special loan product.
Doctors’ default rate on loans is much lower compared to other types of borrowers. Some estimate it as low as 0.2% versus the standard consumer rate, which is several times larger.
Lenders also realize doctors have opportunities for loan forgiveness via various state and federal programs.
These are just some of the common reasons why physicians are offered a particular category of mortgage loans. In part 2 of our physician loan guide, we’ll explore the benefits of this product.
Physician Loan Guide Part 2: What Are The Benefits?
Several differences make a physician loan more enticing to doctors than standard mortgage loans. Let’s look at some of the most significant benefits.
1. A Smaller Or No Downpayment
Typically, someone looking to buy a home would have to save for several years to accumulate enough savings for a 20% downpayment.
Many physicians have a considerable amount of debt, which can make this process seem daunting.
However, with a physician loan, a 5-10% downpayment is frequently sufficient for many lenders. Some lenders are even open to not requiring a downpayment.
No downpayment often means a variable interest rate, which can vary your payment requirements from month to month. But, despite that challenge, a “no downpayment” mortgage may still be to your best advantage.
2. No PMI
PMI (Private Mortgage Insurance) is something lenders require if you are offering less than 20% as a downpayment. I
t’s up to you to pay the PMI premiums (generally available between .3 to 1.2%) until the lender recoups the full 20% downpayment, then the payments cease. This may take years.
But physician loans do not require the borrower to purchase PMI. This is a somewhat unique feature and one that can add up to significant savings in a relatively short time.
3. A More Forgiving Debt-To-Income Ratio
A high debt-to-income ratio (i.e., a DTI ratio above 43%) would generally make it very difficult to get a mortgage.
But when it comes to physician loans, lenders don’t count the full standard payment on your student loans. Instead, they only consider what you pay on your income-driven repayment.
Lenders consider the higher-than-average-salaried, more secure job market of doctors worth the risk of overlooking a high student debt.
However, like standard mortgages, your other debts (credit cards, vehicle loans, lines of credit, etc.) can affect your DTI calculation.
4. No Caps Or Extra Fees On Large Loans
The Federal Housing Finance Agency conforming limit (i.e., it conforms to Fannie Mae/Freddie Mac requirements) is $548,250, as of 2021, for most counties in America.
But physician mortgages are exempt from how much the applicant can borrow and from the additional charges that commonly accompany large loans.
5. Competitive Mortgage Rates
If you borrow a significant amount for your home, it will usually be accompanied by a larger interest rate.
Again, some lenders give physicians special consideration and charge comparable rates as compared to conventional mortgages. Your credit score will factor in significantly here.
We’ll get more into detail about that in the next section of our Physician Loan Guide, which explains how you might be approved.
Physician Loan Guide Part 3: How Do I Get A Physician Loan?
Lenders realize that becoming a doctor, dentist, or veterinarian is a multistage process.
The lending criteria often varies depending on how far the applicant is in their training and career development. For example, programs tend to have greater maximum loan amounts for attending physicians than interns, residents and fellows.
Let’s see some of the other rules for a physician loan.
Primary Residence Only
These loans are not available for purchasing a second or vacation home. However, specific lenders may consider a physician loan to purchase a two-to-four unit investment property so long as one of the units is the primary resident of the physician.
Your credit score (sometimes called FICO score) will factor into whether you can be approved for the mortgage and what rate you might pay. A credit score of 720 or more is a good place to be, but it’s not hopeless if you are below.
Your Employment Contract
Many physician loans are based on your signed employment contract vs. having to produce months or years of pay stubs as proof of income.
Houses are preferred
Most lenders won’t consider physician loans if you are buying a condo. There are a few exceptions, but be prepared for less flexibility.
The River City Mortgage Seal of Approval
Another factor that can make a big difference in purchasing your home is having the endorsement of your lender accompany the offer on the home you want.
In the case of River City Mortgage, we offer an exclusive seal of approval on our pre-approval letters. This lets others know that your case was examined and approved by our top specialists, including the president of Rivery City Mortgage.
This is because the housing market can be very competitive for buyers, especially if the house is in a desirable area and has a high probability of future resale.
Having a pre-approval letter with your purchase offer is crucial because sellers are less likely to consider your offer without it. In addition, the weight of a respected lender behind your offer can put it at the top of the pile, giving you an edge over others vying for your home.
Reach Out to River City Mortgage
We hope this physician loan guide was helpful.
If you are a physician looking to purchase a home and have any further questions, contact a River City Mortgage loan officer right away.
It’s free, and we’re ready to help you find a way to get the keys to your future.