As the cost of dental and medical schools continue to rise, the amount of student loan debt does too. With the average amount approaching $300K, it’s becoming harder for new graduates to feel as if they can buy a home early in their career without some sort of help. Physician mortgage loans are becoming a more popular option for homeownership for those of us that start off with six-figure school debt.
Two months before I completed my residency, my wife and I made our first home purchase. At the time, we’d never heard of physician home loans (AKA Doctor loans). We were under the impression that the job I was supposed to start shortly after training would more than enough cover the mortgage.
Unfortunately, it fell through leaving us with having to take out an interest-only mortgage even though a doctor loan may have been a better choice. Luckily, we were able to pay it off freeing up cash to invest more in after tax accounts.
For most new grads, the thought of leaving a cramped apartment and never having to rent again is a great feeling. It was for us!
Who wants to keep renting after spending 8+ years post-college studying till the wee hours of the morning?
After graduation, you’ve also got to realize your friends have been homeowners for several years, while your head has been stuck in a book. They’re driving nice cars and golfing on the weekends. Most aren’t living the stealth wealth life!
So it’s hard not to want everything they have after you’ve sacrificed so much, right? Dave Ramsey calls this type of thinking, “Doc-itis.” We want everything now and don’t care about the cost!
Now there’s a mortgage loan that can help with this type of situation with little to no money down and no private mortgage insurance (PMI). In my opinion, there’s no reason why medical professionals have to stand on the sidelines while everyone else buys a home.
Let’s find out if a physician mortgage loan is right for you…
What Are Physician Mortgage Loans?
Here’s a brief overview from my friend over at Curbside Real Estate:
Physician mortgage loans are home loans with unique terms offered only to medical doctors and now has expanded to other medical professionals such as:
- dentists/dental specialists
- doctor of osteopathic medicine
- nurse practitioners
- physician assistants
- and others
These loans are becoming more popular to help new grads get a head start with home buying. Lenders are also enjoying servicing more high-income professionals too.
Bank of America said it’s seen the dollar volume of physician mortgages it issued between 2008 and 2017 increase nine fold because of greater awareness from consumers.
Also, LeverageRx, which is a website that compares physician mortgage lenders, has noticed a 51% jump in doctors searching for the loans year-to-date, compared with the same period last year.
These loans have fewer restrictions for borrowers than conventional loans because lenders generally trust doctors to be responsible borrowers even though they’re coming out of training with high amounts of debt.
Doctors often apply for these mortgages when they’re in residency or shortly after graduating med school like Dr. William Ngo that was featured by CNBC.
When Dr. Ngo was searching for his first home at the end of his training, he ran into a problem: He got rejected for a mortgage because he had about $250,000 in student debt and little to no savings.
This is the typical scenario that most new grads face. – High debt and no savings.
So the surgeon applied for a doctor loan that allowed him to become a new homeowner.
5 Features Of Physician Mortgage Loans
Here’s a diagram of the differences between physician mortgage loans and conventional loans via Student Loan Hero:
1) Avoids PMI
One of the most enticing features of a doctor loan is the fact that most lenders require zero or a very low down payment without having to pay private mortgage insurance (PMI).
You maybe asking yourself, “What’s PMI?”
Typically, lenders require borrowers to pay an insurance policy (PMI) to protect themselves. They don’t want to lose money on the mortgages they approve if a buyer can’t make their monthly payments.
So the banks did the math and determined they can recover about 80% of a home’s value at a foreclosure auction if the buyer defaults and the bank has to seize the house. This is why they require 20% down or the borrower must pay PMI.
Because new graduates don’t make enough in training to typically save up a 20% down payment, doctor loans could be a great option.
2) Can Close Earlier
“Most physician mortgage loans will allow you to close on your new home up to 90 days before the start of your job,” says David Hager (Physicianfinance@gmail.com), mortgage loan of Sun Trust bank based in Jacksonville, FL. “You just have to provide an employment contract outlining what you will be making as evidence of future earnings. Compared to a traditional mortgage, they require you have at least a 30 day pay stub.”
An example of how this can help would be someone that has a job ending in Louisiana and is starting a new one in beautiful Montana, my favorite state! A doctor loan would allow this person to close before the start of the new job which would make the transition that much easier, especially if moving a family.
3) No Jumbo Loan Rate Increases
A doctor loan also helps when a more expensive home would require the borrower take out a jumbo loan. Typically on loans over $484,350 (also depends on the area of the country you live in), a jumbo loan is required for the purchase. Lenders that provide doctor home loans often extend the same interest rates to jumbo loans as well.
4) Special Treatment of Student Loans
Another reason many doctors love physician mortgage loans is the fact that most banks give them special treatment regarding their typically large student loan balance.
David Hager also states that, “Doctor Loan Programs do not include student loan debt in the debt to income ratio (DTI). Most student loans are Income Base Repayment, so all you need to do is show what that payment is and the Doctor Program will use that amount. Fannie Mae, for example, would use 1% of the outstanding balance, that would kill the debt to income ratio for doctors.”
5) Flexible Terms
Most of the options available for conventional mortgage options are also available for doctor loans such as:
- 30 year fixed
- 25 year fixed
- 20 year fixed,
- 15 year fixed
- 10 year fixed
- 10/1 Fixed/ARM
- 7/1 Fixed/ARM
- 5/1 Fixed/ARM
- 3/1 Fixed/ARM
What are the Cons to Physician Mortgage Loans?
As with every decision we make, it’s important to take into consideration both the pros and cons.
We’ve already discussed five features that make these loans attractive but what about the negatives?
Higher Interest Rate
Lenders have to make up their losses from not charging PMI to accepting borrowers with a high debt-to-income ratio by charging slightly higher interest rates.
Physician mortgage loans are normally 0.25% to 1% higher than the lowest rate 20% down alternative loan.
There’s always a cost to not putting anything down. In this case it’s indirect and easy to overlook.
We’ve discussed how doctors loans are designed to make it easier to qualify (especially while still in residency), but…..is it too easy?
This reminds me of the last time I bought a truck. Ever since we became debt-free, I’ve decided to never again have a vehicle payment. I did my research before stepping foot on the car lot and knew what the fair purchase price was. After the test drive, the salesman attempted to make the buying decision as easy as possible for me by offering a range of different monthly payments depending on my budget.
As someone who’s studied marketing, sales and psychology, I realize it’s much easier to make a decision to buy a car for $399/month than it is for $44,000. Selling the monthly payment instead of the total amount has a higher rate of success for the salespeople. I get it.
Physician mortgage loans are the same way except they sell the monthly principal and interest payment. For example, if you’re currently renting for $1,400/mo and are told you can buy a $350K home for roughly the same monthly cost with a 30-year mortgage at a 4.2% fixed interest rate, sounds like a no-brainer, right?
As a homeowner, you have to consider all of the OTHER expenses that come with owning a home such as:
- expected/unexpected maintenance and repairs
- HOA fees
- lawn care
Before you sign up for a large six or seven figure mortgage, take the time to figure out how this loan will affect your budget. It’s important to know what your debt-to-income ratio would be after buying a home.
Will you be able to comfortably make your student loan payments? Consider other things you like to do such as traveling or other priorities.
If you get locked into a pricey mortgage, it can seriously affect your future options, so consider those carefully.
Just as putting no to little money down can be a good thing, it can also become a bad thing if not careful.
In theory, it’s nice to get out of training into a home without having to save for a down payment. But in reality, it also means that the new homeowner will have zero initial equity in the house.
This could become a major problem if for some reason, the home needed to be sold quickly and the value of the property hasn’t increased enough to pay for the closing costs.
Should you get a doctor mortgage loan?
As much as physician mortgage loans can be a valuable tool for young doctors getting their first homes, it’s always a good idea to run numbers for different scenarios depending on your unique situation and only buy the house you can afford.
Let’s run through an example for Dr. H who’s married and interested in purchasing their first home priced at $300,000.
He’s contemplating using either a doctor mortgage or a conventional 30 year mortgage.
Let’s compare the two:
Doctor Loan Terms:
- $0 down
- 30-year fixed rate loan
- Interest: 4.5%
- Monthly mortgage payment is $1,520.06
Over the life of the loan, Dr. H will pay $247,220 in interest.
Conventional 30-year fixed Terms:
- 20% down payment = $60,000
- Amount financed = $240,000
- Interest: 4.25%
- Monthly mortgage payment is $1,180.66
If he goes with this option, he’ll pay $185,036 in interest.
After Dr. H looked at both options, he chose to run numbers regarding one other scenario. He wanted to know if he chose the 30-year fixed option, but paid the same monthly amount as the doctor loan ($1,520.06), what amount of interest would he pay?
Answer = $112,243 in interest
This would save him almost $135,000 in interest over the doctor loan option and would also allow him to pay off the house in 19 years instead of 30.
When Should You Avoid Physician Mortgage Loans?
Are there times when you should choose a fixed mortgage option over a doctor loan? Absolutely.
Here’s a handful of reasons:
- If you’re in a financial position to save a minimum of 20% down
- If you’re currently in the military (thank you for your service!) – Consider a VA loan
- After running numbers, you decide on buying a bit more house than you can (think) you can afford because of having to pay $0 down.
- You aren’t comfortable starting out 5-10% underwater on your home (in other words, you don’t want to write a big check to get out of it if your circumstances change)
Where Can You Find a Physician Mortgage Loan?
If you’re looking for assistance finding a realtor and a great mortgage rate, my good friend Dr. Peter Kim, a.k.a. Passive Income MD, has a free concierge service you may want to look into.
Curbside Real Estate works with a nationwide network of vetted realtors and lenders to simplify the home-buying experience for physicians.
Visit Curbside Real Estate to view a video from Dr. Kim to learn more about how his service works.
As an added bonus, my readers will receive a $100 bonus at closing if you choose to use their services to purchase a home.