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All About Physician Mortgage Loans

Physician mortgage loans (also referred to as doctor mortgage loans, physician loans and doctor loans) are a popular option for physicians looking to buy their first home, especially for early career physicians who don’t have enough money for a down payment or who have a high debt to income ratio because of student loans. Many banks and mortgage lenders offer this option, and though each of their products varies in exact terms, they generally lower the barrier to entry into home ownership as physicians are generally seen as great clients for banks who are at a low risk of defaulting on monthly mortgage payments.  During the home buying process, you’re likely to come across the term and mortgage option. Below, we cover what a physician mortgage loan is, its pros and cons, and how to decide if it’s a good fit for you.


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Summary guide for physician mortgage loans


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The Basics of Physician Mortgage Loans


A physician loan or doctor loan is a special mortgage product offered by certain lenders  to help doctors and other high-income earning professionals to secure a home loan with fewer restrictions than a conventional mortgage.


Physician borrowers are attractive to banks because they rarely default on payments and often establish large banking relationships, which could also include checking and savings accounts, investments, and practice loans. For the potential of a long-term relationship, several banks make exceptions to conventional mortgage protocols which can help physician home buyers in situations such as:

  • An unfavorable debt-to-income (DTI) ratio with a high student loan balance

  • No attending salary coming in yet

  • Not enough cash on hand for a conventional down payment



How Physician Loans Work


Physician loans have many similarities to conventional mortgages, but they have a few key differences that can be beneficial for physicians house hunting:


  • No PMI (private mortgage insurance) for down payments less than 20%

  • Can offer a zero down payment, 100% financing option, or options for 5-10% down

  • Assess your student loan minimum payments versus your student loan total balance

  • Student loans in repayment programs can receive additional favorable treatment

  • Will accept a signed job contract before you start your job versus proof of existing income


PMI is an insurance policy that the lender typically takes out with a conventional loan product where a down payment of less than 20% is made. This is to protect themselves from you defaulting on your mortgage loan, but you pay the cost of the policy. It can cost hundreds of additional dollars a month and offer you zero benefit, so being able to avoid paying this is an attractive option if you don’t have a significant down payment.


That said, banks are in the business of making money. There’s no such thing as a freebie. Oftentimes, fees get wrapped into the physician loan by means of higher interest rates. Additionally, the bank will be making more money in interest from you over the life of the loan, as you will be financing a larger amount of money.



Who Qualifies for Physician Loans


One of the advantages to physician loans is that many doctors, such as graduating residents and fellows, can qualify for these special mortgages who can’t qualify currently for a conventional mortgage.


You will ideally want a FICO credit score of 720 or above. If you have a lower credit score, you may still be able to qualify, but you may have to make a larger down payment or get a higher interest rate.


Student loans in the Income Driven Repayment (IDR) programs such as IBR, PAYE, and SAVE get special treatment under physician loans. Often, any student loan that is deferred for at least 12 months will be excluded when assessing the mortgage. And the lower income-based repayment will be taken into account instead of the amortization method used for conventional mortgages. This can help recent graduates with high student loan balances qualify who wouldn’t otherwise be able to buy a home.


For a physician loan, you don’t have to have proof of current income. If you are a graduating resident with a signed employment agreement, your contract can be enough to qualify you for a physician loan. This can allow you to purchase a home sooner than a conventional mortgage, which requires proof of income, generally via pay stubs from a current employer.


What if I’m a locums doctor?

Locums physicians and other 1099 contractors will likely need to produce two years of income history (tax returns) since they have variable income. This is the same as if you were applying for a conventional mortgage, which is why we often encourage physicians planning on switching to locums to secure their mortgages prior to making the switch. You may know that you can replace (or even increase) your income at your W2 job by switching to locums, but it is a risk for the bank to take that they are often not willing to entertain.



Pros and Cons of Physician Loans


Although the term “physician” loan may make you feel special, it is not always the best financial decision and you should carefully weigh the advantages and disadvantages.

Advantages of Physician Loans

  • No (or little) down payment - can get 90-100% financing, thus allowing you to buy a more expensive house than you’d be able to afford if you had to make a conventional down payment

  • Can be useful when you don’t have a down payment because of lack of substantial savings, or would prefer to direct that money towards other expenses such as student loans, a growing family, or practice buy-ins

  • No private mortgage insurance (PMI)

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

  • Less disqualification based on credit scores or debt to income ratio (important for physicians with student debt), and more emphasis on the physician’s contract

  • Student loans in Income Dependent Repayment (IDR) programs such as IBR, PAYE, and REPAYE can get special treatment they don’t get with conventional mortgages.

  • Can close on your home before you start working

Disadvantages of Physician Loans

  • Can have higher interest rates than a conventional loan, because they wrap in costs instead of presenting them upfront.

  • Even if offered a similar interest rate, by putting 0% down, your loan balance is higher, which means a larger percentage of your monthly payment will go towards interest. This means it will take longer to pay off your mortgage, and you will pay a lot more in interest over the life of the loan.

  • The less equity you have, the less security you have. Let’s say your job doesn’t work out, you get divorced, or this house no longer meets your needs. If you have to sell quickly or in a bad seller’s market, you may have to write a large check to make up the difference on the amount between the sales price and the amount you bought the house for.

  • If you take a physician loan assuming you will invest the money and get higher returns, you are taking on multiple risks - that the other investment loses money or doesn’t do well enough to offset the interest you are paying in post tax dollars, that you don’t deploy the money, or that you just end up spending the money.

  • May encourage you to buy more house than you should, leading you to be “house poor.”

  • May encourage you to buy a house earlier than you would have otherwise, in a situation where it’s better to rent. Many physicians change jobs within the first few years out of training, and the costs associated with buying and selling a house are substantial.



Who Should Consider a Physician Mortgage Loan


If you have enough cash available for a down payment, especially 20% down to avoid PMI with a conventional mortgage, the conventional route may well be the better option for you (but shop around and make sure to compare rates and options). Especially at 2024 interest rates, there are few things that will give you the same guaranteed ROI. Remember that even if you make 8% in the market, you will pay taxes on those gains, and most doctors pay their mortgage payments in post tax dollars, so it’s not as simple as saying, “My mortgage is at 6.5% and my portfolio is yielding 8%.” However, if you have high interest debt such as credit card loans or are anticipating a practice buy in or have an opportunity to invest in real estate where you will gain equity and appreciation, you may decide this is a better use of the money you would otherwise use for a down payment in a conventional mortgage.


Physician loans offer early career physicians the opportunity to get into home ownership earlier than conventional loans. After an extensive post-college training course, many physicians feel behind the curve when it comes to major life milestones, including purchasing a home. A doctor loan can allow them to stabilize their living situation and start building equity sooner. It is important to love where you live and not delay gratification forever, so in a scenario where you are confident that you will be in a home long term, but just don’t have the down payment, a physician loan becomes a very attractive option.


That said, we don’t always recommend purchasing a home right out of residency, especially if you only plan on being in the current area for a few years. Many physicians switch jobs in the first few years of practice, and it’s very possible to lose money on a house in a short time frame. This is especially true for a physician mortgage, where not having significant equity in the house from the get go can mean you have to come to the closing table with a large check because of how much you owe the bank after paying transactional fees and not building enough equity in the home.


If home ownership aligns with your current situation, physician loans can be a great option for first-time home buyers.


Learn more about when to consider buying in our physician’s guide to home buying.



Other Mortgage Loan Options for Physicians


When considering a physician loan, shop around and check other options as well. Several exist such as:

  • Conventional loans

  • ARMs (adjustable rate mortgages)

  • VA loans

  • FHA loans

  • Jumbo loans


Each option has its advantages and disadvantages. Our mortgage lending sponsors below can help you compare options to find the best deal for your situation.


Learn more about different loan options on our guide to physician mortgages



Where to Find a Physician Loan


Not all lenders offer physician loans and not all offer them in all states. Our sponsors below have been used and well reviewed by members of our physician community when looking for physician loans in different states.


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



Physician Loan FAQs from Our Facebook Communities


I am looking into buying another home, can I use a physician loan for this purchase?


You can typically get a physician loan for a primary residence you will be living in (versus leasing or renting out), even if you’ve used a physician loan before. Some banks may not be willing to offer you a physician loan if you have one already on your current residence, but you may be able to get one for a home you are purchasing before you sell the one you are occupying. Different lenders have different rules and terms for their physician loans, so it’s always best to reach out and check directly.


Can I refinance a physician loan?


Some mortgages carry an early repayment penalty, but most don’t, allowing you to refinance when suitable. We recommend refinancing as situations (interest rates, amount of equity in the home, etc.) change if you can get a better offer for a new physician loan or conventional mortgage.




Should I put nothing down with a physician loan and invest my down payment instead?

You can, but it’s not always the best option.


If you take the physician loan assuming you will invest the money, make sure you actually invest that money. If it sits in your bank account or if you spend the money instead, you end up losing money with this strategy. Also, be prepared for a situation where your investment loses money, as this is always a possibility, whereas paying down your mortgage has a guaranteed ROI.


Interest rates can also play a factor into this decision. Generally, the lower the interest rate you have, the more beneficial this can be. For interest rates under 4%, this can be a good way to leverage your money, depending on your personal goals and risk tolerance. Above 4%, things get more complicated..



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