Owning a home is a dream investment for many. However, it’s not always a smooth endeavor for doctors.
Medical practitioners can struggle to get mortgage loans because of the huge medical school student debts that affect their debt-to-income ratio (DTI). Besides, it can take a long time to establish a medical career in some states, making it challenging for resident doctors to offer proof of employment or income, disqualifying them from conventional mortgage loans.
Luckily, most lenders have realized that medical school fees can be astronomical, leaving doctors with debts that bar them from accessing conventional mortgage loans. As a result, they have designed loans tailored to cater to the mortgage needs of doctors: physician loans.
In this article, we’ll offer a detailed look at physician loans, what they are, how they work, and how to qualify for one. So, let’s dive right in!
What Is a Physician Mortgage Loan?
To begin with, let’s first understand what a physician mortgage loan is.
A physician mortgage loan is a mortgage program explicitly designed for medical practitioners. This loan program helps doctors build or refinance their primary residence.
Physician mortgage loans don’t require private mortgage insurance (PMI), and they need little or no downpayment. Besides, a physio mortgage has looser qualifying requirements compared to other mortgage loans.
How Does a Physician Loan Work?
So, how does a physician mortgage work?
A physician loan, just like a conventional mortgage loan, is meant to help in the purchase or refinancing of a primary residence. However, unlike a conventional mortgage, a physio mortgage doesn’t require PMI, calls for little or no down payment, and has flexible DTI requirements.
Typically physician loans can offer 100% mortgage financing for qualifying medical practitioners. These loans come with high loan limits of $1 million and above, depending on the lender.
Most lenders cap physician loans at about $1 million for 100% financing and up to $2 million for 90% financing. Some home loans for doctors extend to as high as $5 million.
Lenders understand that the journey to becoming a doctor or dentist is long. As a result, the loan amount and the lending terms vary depending on your position in your medical career. Attending physicians qualify for higher loan amounts than interns, fellows, and residents.
It’s important to note that physician loans fall under Adjustable Rate Mortgages (ARM), meaning the interest rates aren’t fixed; they vary from time to time. So while it’s likely for you to pay lower rates initially, they can switch to much higher in the future. The rates vary depending on the lender. Basically, an ARM can have a negative impact on your financial planning and budgeting.
Like other conventional mortgages, you can’t use a physician mortgage loan to finance a second home, investment property, condo, or vacation home. You must use it to buy or refinance your primary residence.
However, some lenders approve physician mortgage loans intended to buy or refinance a two- to four-unit investment property, provided you use one of the units as your primary residence.
How to Qualify for a Physician Loan?
Typically, a physio mortgage loan has looser qualifying demands. First things first, these loans are meant for medical practitioners, so they are open to doctors with either a degree as a Doctor of Medicine (MD) or Doctor of Osteopathic Medicine (DO).
You can also qualify for a physician loan if you are a dentist or orthodontist holding a degree as a Doctor of Dental Surgery (DDS) or Doctor of Medicine in Dentistry (DMD).
Some lenders also offer mortgages to veterinarians holding a degree as a Doctor of Veterinary Medicine (DVM) and to podiatrists with a degree as a Doctor of Podiatric Medicine (DPM).
Your loan limit and loan terms will depend on your qualifications and experience in the medical field.
To qualify for most physician loans, you need a credit score of 700. However, some lenders can still issue physio mortgages with a credit score of 680. But to be on the safe side, it’s advisable to have a credit score of at least 760.
Before issuing any type of loan, lenders scrutinize your debt-to-income ratio to determine your creditworthiness. A lower DTI is considered less risky for the lender.
However, physician loans accommodate borrowers with higher DTIs. This is because lenders understand that doctors, especially those in the early stages of their careers, may have significant medical school debts that affect their DTI
In most cases, the physician loan mortgage calculator doesn’t factor in medical school debt when computing your DTI. So, higher DTI isn’t a deal-breaker in physio mortgages.
Besides the credit score and DTI, lenders will also need proof of employment or income. Unlike other conventional loans, physician loans are flexible because you can use an employment contract as proof of employment to secure a physio mortgage even before your residency begins. You can also use pay stubs or W-2s to prove you have a stable source of income.
How to Find a Physician Loan
There are many types of lenders issuing physio mortgages, among them community banks, national lenders, and independent online mortgage lenders.
So, it’s good to shop around and do a lot of consultations to find a lender who suits your needs. Compare their credit score and DTI requirements, financing options, loan amount, loan term, and interest rates. Also, check whether the lender offers physician mortgage refinance loan options.
Apply for a Mortgage Loan
Once you have found a lender who suits your needs, the next thing is to apply for the loan. And depending on the lender, you may make an online or face-to-face application.
When applying for a physio mortgage, ensure you have all the required documents, including a contract of employment, pay stubs or W-2s, and proof of self-employment.
Pros and Cons of Physician Loans
Here are the pros and cons of physician mortgage loans:
Pros
- Flexibility: Little or no down payment and no PMI
- Fewer proofs of income: Most lenders accept a contract of employment as proof of work and income.
- High borrowing limits
- Accommodates applicants with higher DTIs
Cons
- Adjustable-rate mortgages (ARMs): Physician loans fall under ARMs, and you may end up paying more to service your loan in the long run
- Less flexibility: During your early years as a medical practitioner, it isn’t guaranteed that you’ll work in one region for, let’s say, over 1-5 years. So owning a home reduces your location flexibility as opposed to renting. This may result in losses if you decide to sell your home.
Alternatives to a Physician Mortgage Loan
A physician loan isn’t the only mortgage program available for medical practitioners. You can still apply for other loans such as:
Conventional Loans
Conventional loans are the most common way to get mortgage loans. To qualify for these loans, you need a high credit score, relatively low DTI, and proof of employment or income.
These loans require a down payment or PMI. If you are able to raise a down payment of at least 20 percent, you don’t need a PMI. On the other hand, if you don’t have the required down payment, you’ll have to pay as much down payment as you can and still have a PMI.
Although you will deal with the down payment and PMI that adds to your monthly repayments, you won’t have to worry about the interest rates changing in the course of your loan term like with most physician loans.
FHA Loans
FHA loan is a mortgage program insured by the Federal Housing Administration and backed up by the government. These loans have fewer qualifying demands compared to conventional loans, especially in terms of credit score.
They also have a relatively low downpayment, between 3.5 percent or 10 percent. However, there are restrictions on the amount you can borrow, ranging from $356,362 to $822,375 for single home units in low-income counties and high-income counties, respectively.
So, if you want a fixed-rate mortgage with fewer restrictions, FHA loans may be a good choice for you.
VA Loans
VA loans are a type of mortgage loan issued to qualifying veterans, active members, and their spouses. These mortgage loans are backed by the department of veteran affairs. As a result, they allow past and present service members to access less expensive mortgage loans even with a bad credit score.
You don’t have to pay any down payment or PMI to get these loans, and the rates are relatively low. However, to qualify for VA loans, you’ve to meet the set eligibility requirements.
Bottom Line
If you are a medical practitioner looking forward to owning a home, physician loans can help you achieve this investment goal. However, it’s important to know how these loans work and whether they are a good fit for you. It’s also important to know other viable options available.
If you carefully analyze the information and insights discussed above, you’ll make a sound mortgage decision. Good luck in your homeownership journey!
Featured Image: Megapixl
