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Guide to Mortgages for Physicians

(Navigating physician mortgage loans, conventional mortgages & refinancing)

Your primary residence may be one of the largest financial commitments you make, so understanding the terms and types of mortgage loans available to finance your future home are important. With recent fluctuations in the housing market and with a higher interest rate environment recently, the decision to purchase a home versus rent has become more complicated. That said, most doctors will elect to buy a home, and it’s important to understand the various options available for physician mortgages. Below, we cover considerations when evaluating mortgages, including the different mortgage types such as conventional and physician loans, mortgage terms and lengths, and when to consider refinancing.

 

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Fifth Third Bank: Tony Lupescu (tony.lupescu@53.com) does physician loans.  He can do loans in Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, South Carolina, Tennessee, and West Virginia. NMLS #224410.

 

Central Bank of the Midwest: Brian Smith (brian.smith@centralbank.net) does physician loans in Arkansas, Colorado, Florida, Illinois, Iowa, Kansas, Missouri, North Carolina, and Oklahoma.  NMLS  #1452834.

Wintrust Mortgage: Garrett Larkin (glarkin@wintrustmortgage.com) and his associates do physician loans in Arizona, California, Florida, Illinois, Indiana, Iowa, Minnesota, Montana, North Dakota, and Wisconsin.  NMLS #945946. 

Terminology

Types of Mortgage Loans for Physicians to Consider

There are several different types of mortgages available to doctors.

Types of mortgages for doctors

 

We’ll cover each briefly, then explore the most popular mortgages for doctors below.

Conventional Mortgages

 

Conventional mortgages are typical mortgages, where you secure financing from a non-government lender such as a bank, provide a down payment (usually at least 20%), and pay interest which can be variable or fixed.

 

Without a 20% down payment, you are typically subject to private mortgage insurance (PMI), which is an insurance policy the lender takes out against you (and makes you pay for!) in case you default on your loan. PMI can add up to several hundred dollars a month on top of your mortgage payment of interest and principal.

 

There are different lengths of payment and terms depending on the product. The classic situation is a 30-year payment term, although many people also elect to take a 15-year payment or sign up for something called an ARM. We go into these in more depth below, as this applies to the other types of loans discussed here as well.  

Jumbo Loans

A loan is considered “jumbo”  when it is higher than the conforming loan limits set by the Federal Housing Finance Agency (FHFA). Unlike conventional mortgages, a jumbo loan cannot be purchased, guaranteed, or securitized by Fannie Mae or Freddie Mac. As such, they are usually subject to more stringent underwriting criteria. For 2024, for single family homes this is $766,550 in most areas and $1,149,825 in high cost of living (COL) areas.

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Physician Mortgage Loans

 

While each program differs slightly, fundamentally, a physician loan offers the opportunity to buy a house without putting down a substantial down payment (often zero down up to a certain amount) or without having to meet many conventional loan requirements. This is predicated on the belief by the bank that you are good for the payments with your attending physician paycheck, and that you are an attractive client for them to build a banking relationship with for future needs such as savings and checking accounts, investments, and private practice and other lending needs.

 

Lenders typically require a signed employment contract to qualify. Independent contractors or locums physicians usually still have to provide 2 years of tax returns to prove income.

 

Physician loans can typically only be used for a primary residence, although there are some ways to use it for an investment property.

We cover more on the pros and cons of physician loans below.

VA Mortgage Loans

 

Mortgages offered by veteran affairs (VA) are generally for military veterans. To check eligibility for VA loans, visit the housing assistance section of the VA website.

Some of the advantages and features to a VA loan are:

  • Has little or no down payment

  • No PMI

  • Often lower rates/closing costs

  • Favorable financing requirements (credit scores, debt-to-income ratio)

  • Cash out refinancing option

 

Disadvantages to look out for:

  • Funding fees

  • Can only be used for a primary residence

  • May be less attractive to sellers in a hot housing market secondary to inability to waive certain contingencies related to home appraisals or inspections

FHA Mortgage Loans

 

Federal Housing Administration (FHA) loans can be used by those with lower credit scores or who can only put a small percentage down. While rates may be better than a physician loan, there are additional upfront and ongoing fees that may not be worth it. Additionally, student loans can make it tricky to qualify.

 

80/20 and 80/10/10 Mortgage Loans

 

These types of loans essentially allow you to avoid PMI by paying higher interest rates on the 10-20% portion you would have put down for a down payment. It’s worth doing a comparison of the interest rate and monthly payment over the life of the loan versus a conventional mortgage or physician loan to see if this option is favorable in your situation.

Physician Loans

Pros and Cons of Physician Mortgage Loans

Although the term “physician” loan may make you feel special, it is not always the best financial decision. Banks are in the business of making money, and there’s no such thing as a freebie. Carefully weigh the advantages and disadvantages listed below, and read the section below about physician loans versus conventional loans. 

 

That said, physician borrowers are attractive to banks because they rarely default on payments and often establish large banking relationships, and the bank’s willingness to make exceptions to normal protocol may be what you need to buy your first home.

The pros and cons of physician mortgage loans for doctors

Advantages of Physician Mortgage Loans

 

  • No (or little) down payment, allowing you to buy a more expensive house

  • Can be useful when you don’t have a down payment because of lack of substantial savings, or prefer to leverage your mortgage to tackle student loans, grow your family, buy into a practice, or invest

  • No private mortgage insurance (PMI)

  • Favorable terms on “jumbo” loans, and overall higher loan amounts allowed

  • Less disqualification based on credit scores or debt burden (more emphasis on your job contract)

  • Student loans in Income Driven Repayment (IDR) programs such as IBR, PAYE, and SAVE can get special treatment

  • Can close on your home before you start working

 

Disadvantages of Physician Mortgage Loans

  • Can have higher interest rates

  • By putting 0% down, your loan balance is higher, meaning you’re paying interest on more money, thus resulting in a higher amount of total interest paid

  • The less equity you have, the less security you have

  • If you take a physician loan to invest, your investments’ gains may not keep up with your interest rate

  • You may buy more house than you should, leaving you house poor

  • May encourage you to buy a house earlier than you would have otherwise, in a situation where it’s better to rent

  • If you have to sell your house before building significant equity and the house sells for less than what you bought it for or transaction costs are higher than the equity you have, you may have to bring a check to closing.

 

If you take the physician loan with little or no down payment assuming you will invest the money that you would have put down for a down payment to generate more than the loan costs, make sure you actually deploy that money to invest. If it sits in your bank account or if you spend the money instead, you are losing money.

Learn more about physician mortgage loans.

Conventional Mortgage Loan vs. Physician Loan for Doctors

 

Like physician loans, conventional mortgages have advantages and disadvantages. Which loan is better can depend heavily on your situation and isn’t always a purely financial decision.

 

Physician loans, for example, don’t include PMI even if your down payment is less than 20% of the purchase price while conventional mortgages do. Since PMI typically ranges from around 0.5% - 2% of the entire loan amount every year, it can add a significant cost to your loan. Beware though, the bank may still make up the difference by wrapping it into the interest rate of the entire loan instead. Since PMI can eventually be removed, this can make physician loans more expensive in the long run. Compare interest rates for both options when shopping for your mortgage. Our mortgage lender sponsors can help.

 

Physician loans can be a great option for residents and new attendings just starting out in their careers and their financial journey, as they can be easier to qualify for than conventional loans. Conventional mortgage lenders stick closely to their metrics of determining how much you can afford and if they think you’ll be a good customer, while physician loans take into account your upcoming earnings even though residency paid you in peanuts and sleep deprivation.

 

Student loan debt also doesn’t count against you as much with physician loans, which again makes them attractive for physicians early in their careers.

 

If you are closer to financial independence and have built up a good credit score while you paid off high-interest debt, you may find a conventional mortgage the better option for your situation with the lower interest rate than a comparable physician loan. The higher your credit score, the better an interest rate you can typically qualify for, which can add up significantly over the life of a 15-year or 30-year mortgage.

 

Compare your total costs with a conventional versus a physician loan by running quotes for both. To initially compare apples to apples when looking at different loan options, ask lenders to provide quotes with the least amount of closing costs as possible so that you can assess the total costs in each scenario. You can then ask about ways to get the rate down by paying higher upfront closing costs later.

 

If you take a physician loan, reassess regularly whether it still makes sense. Reasons why it might make sense to refinance to a conventional mortgage include:

  • Reaching 20% equity in the house (removing PMI)

  • Getting below jumbo limits on your loan size

  • Improvement in your credit score

  • Appreciation of your house

  • A drop in interest rates

 

Read about the decision between conventional loans versus physician loans in more detail. 

Comparison of physician loans versus conventional home mortgages for doctors

How Much House Can I Buy?

 

When you are looking at purchasing a home, whether for your primary residence or for active real estate investing, one of the first questions you may ask is how much house can you afford.

 

Lenders will often review several different aspects to let you know how much they are willing to lend you, including:

  • Your income

  • Your debt

  • Credit history

 

You may even be preapproved for a certain loan amount.

 

When assessing your debt and income, conventional lenders will look at your DTI ratio (debt-to-income). Most lenders prefer your monthly debt payments to be below 35% of your monthly income, though some will offer loans for DTIs of 45%-50%. Physician loans have their own specific guidelines.

How to calculate your debt-to-income (DTI) ratio when applying for a mortgage loan

Just because the lender tells you they will extend you a loan for that amount doesn’t necessarily mean you can afford it or that you should buy a house that expensive. In fact, we often find that financing as much as the bank tells you that you could finance is a sure fire way to feeling house poor, or not being able to enjoy vacations, nights out, or allow for other discretionary income in your budget because so much of your income is being directed towards the mortgage and housing expenses.

 

Some general rules of thumb we like to consider:

  • Do NOT spend the maximum amount a bank will lend you.  As a physician, the amount you ‘can’ afford is generally pretty high, but you want to avoid being house poor.

  • Housing-related expenses should be less than 20% of your total income. Remember, this is not just your mortgage payment, but all associated expenses, such as insurance, maintenance, repairs, furniture, HOA fees, property taxes, and more. 

  • Your mortgage should be less than 2x your gross income. This may not be possible in high cost-of-living areas, but it is a good target to remember and try to get as close to as possible.

 

Make sure to take into consideration your own personal finances, including:

  • If you’re planning on starting a family (increasing expenses)

  • Do you have other upcoming large obligations (i.e. helping family, owning or buying into a practice, kids’ college, etc.)

  • How much house do you actually need?

  • What are your goals for being debt free and achieving financial independence?

 

Different mortgage types have different down payment requirements, anywhere from nothing down to 20% to avoid PMI. The more of the house purchase price you finance, the more you’ll pay in interest and the higher your monthly payment will be, especially for your first home purchase without any equity from a previous property. While loans aren’t usually front-loaded with interest, the first several years of payments will go primarily toward interest because of the loan amount.

 

Don’t forget to also factor into your house purchase the closing costs, which can range from 3% - 6% of the loan amount and which may be wrapped into the mortgage to calculate your monthly payment. These costs include prorated property taxes, title insurance, closing fees, and several others.

 

One of the biggest pieces of advice we give graduating residents in our Transition to Practice educational series is to be mindful of lifestyle creep. While it may be tempting to get the classic Doctor McMansion as soon as you sign your first contract, you may want to consider a smaller home as you start your career to allow you to pay off high-interest debt and prioritize saving for retirement at the same time, as well as cover all the startup costs often associated with having a young family. Most physicians do find that their housing needs and what they are able to afford changes throughout the course of their career. As such, it’s rare that the first house really is the forever house, so keep the future sale in mind. Buying a smaller house at the beginning may also make it easier to sell later, depending on your location.

 

We all delay gratification for a long time, and it’s important to love where you live and come home to a place that allows you to relax and unwind, so walking the line between being frugal and being house poor can be tricky. Most people do not consider their homes an investment, and it’s okay and even encouraged to spend money for your happiness, but also remember that what makes a house your home is your memories within it. Don’t allow yourself to spend so much that you feel house poor, as you will only contribute to your overall burnout if you know you have to moonlight extra to cover your mortgage payment.  Remember, in general, the less you have tied into your required mortgage payment for the next 15 to 30 years, the more you have to spend elsewhere, giving you options to cut back, vacation more, take other risks, and otherwise live life on your terms.

Learn more on our physician's guide to how much house you can afford.

Comparing Different Mortgage Loan Terms

 

Most mortgages come in either a 15-year or 30-year fixed rate, with pros and cons for each. Fixed rate means that the interest rate and monthly payment remain the same over the life of the loan.

Comparing 15 year versus 30 year mortgage loan term lengths

 

While 30-year loans typically have a higher interest rate by around 1%, your payment will actually be less every month since you have twice as long to pay off the loan. While the lower monthly payment can be a great way to leverage your disposable income for other goals such as investing for retirement, it comes at a cost. With a higher interest rate, the cost over the life of a 30-year loan is significantly more than 15-years.

 

Take for example a $500,000 30-year mortgage at 7.25%. Your monthly payment would be around $3,500 a month, and you would end up paying over $725,000 in just interest to the lender. For a $500,000 15-year mortgage at 6.25%, you would have a mortgage payment of around $4,200 a month and pay around $275,000 in interest. The difference is the same as the original amount of the loan! That’s a significant amount you could invest if you are in the financial situation to opt for the 15-year term.

 

That said, not everyone who opts for the 15-year term will have a half a million dollar mortgage and may not be able to afford the higher monthly payment. A 30-year fixed term mortgage is a great option for a graduating resident or attending earlier in their career. If interest rates continue to fall, it may be more advantageous to leverage your mortgage and invest the difference between a 15-year versus 30-year monthly payment directly into the stock market now.

 

You may also decide to get a 30-year mortgage for the flexibility of room in your budget but treat it like a 15-year mortgage by paying it down like a 15-year mortgage. This can add safety and margin should you encounter a loss in income while giving you the opportunity to save on interest by paying your mortgage off early.

 

Learn more about protecting your income with disability insurance and about paying off your mortgage early or investing instead.

 

Some lenders are now offering even longer terms, such as 40-year mortgages, but we don’t recommend terms this long as you will likely want to have your mortgage paid off as you plan for retirement.

Learn more on how to decide between a 15-year or 30-year mortgage.

ARMs

 

Adjustable rate mortgages (ARMs) are the other common option for mortgages. With an ARM, you have a fixed interest rate for a designated period at the beginning of the loan, then the interest rate can adjust to market rates at set intervals. If rates rise, your interest rate rises, increasing your monthly payment. If rates fall, your monthly payment lowers, as well the overall cost of your mortgage over the life of the loan.

 

ARMs are usually presented as fixed rate period/frequency of rate change. The introductory period for the fixed rate is usually 3, 5, 7, or 10 years. After that, the rate change frequency is usually once a year or every six months.

 

A 5/1 ARM, for example, means the initial interest rate is locked in for the first 5 years, then can adjust once a year after that. A 10/6 means the introductory fixed period is 10 years, then the rate can change every six months.

 

ARMs are usually 30-year term mortgages and may offer better introductory rates than other available 30-year and 15-year options, though not always, so check.

 

Physicians who are still working their way to financial independence may prefer the stability of a fixed-rate mortgage at this stage of life, especially if they have a higher debt burden that absorbs a lot of their income and doesn’t leave a lot of excess to throw at a mortgage if rates change. Physicians who are already financially stable may want to seize the opportunity of a lower mortgage rate in the future, knowing they can ride the turn if rates increase instead, or that they intend on paying off the house prior to the time when the rates will adjust.

 

If you know you will only be staying in a home for a length less than the introductory fixed period and the ARM offers a favorable rate, it can be a better option. Just make sure you’re honest about moving expectations and, if you’ll only be around for a few years, if you’ll make up the closing costs and mortgage interest in time or if it might be better to rent for now.

 

Learn more about how to decide between a 15-year or 30-year or ARM mortgage.

When Should I Refinance My Mortgage?

 

As mortgage interest rates begin to drop after recent highs, many people may be considering refinancing or wondering when might be a good time to consider refinancing. Other reasons you may be considering refinancing is to lower your monthly payment or to do a cash out refinance for situations such as securing funds for a large renovation or paying off student loans.

 

Like the original mortgage, a refinance usually includes closing costs, which can cost you thousands, lowering the potential value of the refinance.

 

Refinancing to lower the interest rate is usually the best reason to refinance. A general rule of thumb that we often see in our physician communities is that if current mortgage rates are lower than your mortgage rate by 1% or more, it may be a good time to consider refinancing. Get some quotes for available interest rates and closing costs, and look at a mortgage amortization spreadsheet to help you determine how much you could save over the life of a new loan by refinancing. Subtract the closing costs from this number and decide if the savings are worth the hassle. The closer you are to the end of your mortgage term or the closer you are to paying off the mortgage, the less a refinance may make sense. For example, if you plan on paying back your mortgage in 2 years to accelerate your pathway to being debt free, a small difference in interest rates over two years would result in substantially less savings than a mortgage you were going to pay off over 30 years.

 

Refinancing to free up income because you are having a hard time making your payments is usually not a wise financial decision if interest rates aren’t also lower, although it may be your only option if cash is particularly tight. A better alternative is to put together a budget and see where you may be able to cut expenses, as refinancing will keep you in debt longer, slowing down your path to financial independence. An alternative might be to downsize to a smaller, cheaper house until you are closer to financial freedom and can afford the more expensive house, or cut out other discretionary expenses.

 

When considering a refinance, we recommend making sure that the equity you have in your house stays in your house. If you are doing a cash out refinance to add a back deck, grill area, and new pool that will add to your home’s market value, it may be worth considering. If you’re thinking about refinancing to help pay down student loans, it likely isn’t worth it. Instead, look into student loan refinancing.

Dive Deeper Into Mortgages for Physicians

 

Above, we present the fundamentals of physician mortgages in an easy-to-digest primer. If you want to learn more about any of the topics above, check out related articles in our blog or reach out to the hive mind in our physician Facebook groups. Happy house hunting!

Disclosure: This page contains an advertisement from a third-party advertiser, Credible Operations, Inc., which is licensed as a mortgage broker in some, but not all, states (see https://www.credible.com/a/mortgage/licenses). Information contained herein is provided for illustrative purposes only, without any representations or warranty as to its accuracy or applicability to you. All credit requests are subject to review and approval, and your actual loan terms will depend on your financial situation. Credible Operations, Inc. is solely responsible for the content of its advertisement and the services it provides.

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