When doctors explore mortgage options for their home purchase financing, they often come across the option of the physician loan. The special name leads many physicians to automatically assume that the doctor loan must be the best option for them, and for many physicians, it is. The physician loan allows you to put as little as 0% down as a down payment without paying personal mortgage insurance (PMI), in addition to having several additional beneficial features that take into account a physician’s unique financial situation. However, before assuming it’s the best option for you, particularly in this high interest rate environment, it’s important to know the pros and cons of going with a physician mortgage vs conventional loan. Both have their advantages and disadvantages depending on a physician’s immediate financial circumstances and long term financial plan and goals. Below, we compare these two common options for doctors shopping mortgages to help you decide which is the best fit for you.
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Understanding Conventional Mortgage Loans
Conventional mortgages are secured financing from a traditional (non-government) lender such as a bank. In exchange for borrowing their funds, you pay back a specified amount of interest on our loan that is either a fixed rate or variable rate–known as an ARM (adjustable rate mortgage).
You provide a down payment, typically 20% or more, for the home purchase, which establishes equity in the house and helps provide stability against housing market fluctuations for both you and the lender. If you put down less than 20% of the purchase price, the lender requires private mortgage insurance (PMI). This insurance is a premium you pay that helps protect the bank from you defaulting on your mortgage payments to them, and can be quite expensive and significantly add to your monthly mortgage payment.
A conventional mortgage lender will assess your finances to determine if you qualify for a loan, using factors such as your income, credit score and debt-to-income (DTI) ratio. Many of these factors can make a physician look like an unattractive candidate on paper for a conventional loan, as a typical physician’s financial trajectory isn’t taken into consideration with these numbers alone. Especially when first coming out of training with a resident or fellow salary, without significant savings, with student loans, and possibly a less than ideal credit history, a lender may deem your situation too risky and determine you don’t qualify for the mortgage you hope to secure despite the fact that you know you will easily be able to afford the home once your attending salary kicks in in a few months.
Learn more about conventional mortgages on our guide to mortgages primer.
Understanding Physician Loans
Physician loans (also known as physician mortgages or doctor loans) avoid some of the underwriting issues early career physicians may face above with a conventional loan.
Physician loans offer features that can make it easier for doctors to purchase a home, including:
Ability to secure a loan before you start working by providing a signed employment agreement
Lower down payment options, allowing you to purchase before stockpiling a significant amount of cash
Student loans in repayment programs such as IBR, PAYE, and REPAYE can get special treatment when assessing your debt-to-income (DIT) ratio and likelihood of defaulting
As you can imagine, for graduating residents and fellows as well as early career physicians, these are huge benefits, as they may have otherwise had to wait a lot longer before purchasing a home.
The doctor loan is a unique option in mortgage lending made specifically for physicians because banks and other mortgage lenders generally see doctors as attractive clients. For one, their relative high income, job stability, and a perceived high probability that physicians will make their monthly mortgage payments based on historical data make them less risky to lend to. Additionally, many banks hope these physicians will expand their banking and investment relationship with them in other realms, such as checking and savings, practice financing, and investments.
Therefore, mortgage lenders offering physician loans generally feel comfortable modifying their normal underwriting process. Physician loans aren’t available by every lender and aren’t always available in every state the lender offers other loan types in. We cover where to find a physician mortgage loan lender below.
Some mortgage lenders offer 100% financing to doctors, which means you don’t need to have a down payment at all to purchase a home. Other physician loan programs will still require a down payment based on the amount of money being financed or local lending patterns, but may reduce the down payment required to 5 or 10%.
Another very attractive feature is that unlike conventional loans, where PMI would be required for loans with less than 20% down, physician loans don’t require PMI. An important caveat here is that they may, however, wrap in the associated cost of this risk into the interest rate offered. Accordingly, the physician loan interest rates can be slightly higher, though this certainly isn’t always the case.
Learn more about physician loans on our guide to physician mortgages.
Are Physician Loans Always Better For Doctors?
While the title and special perks associated with a physician loan might make you assume that doctor loans are always the best option for doctors, this isn’t always the case.
As we discussed above, they certainly do make it easier for doctors to buy a home. Easier, however, doesn’t necessarily mean better. There are several reasons why lowering the barriers to buying a home could actually be detrimental to your long term financial goals and your pathway to financial independence.
For one, a lower down payment may make it easier to buy a more expensive house than you can actually comfortably afford with your budget or what makes sense for your stage of life. When you buy more house than you actually need, remember that all the expenses associated with home ownership also increase - property taxes, home insurance, furniture, maintenance, repairs, and more. This could contribute to financial anxiety, or preclude you from enjoying other aspects of your life like taking vacations or eating out, because you are struggling to pay bills or meet your savings goals (AKA house poor).
Additionally, remember that most physicians change jobs within their first few years of practice, and buying a house too early and then having to sell it within a few years may be very costly with transactional costs and the costs of setting up a house. In a worst case scenario, if you are forced to sell at a bad time in the market, you could find that your house has depreciated in value and because you had no equity in the house, you actually have to bring money to the closing table because the house sells for less than you bought it for.
Even if you stay in the house a long time, keep in mind that you will be paying interest on a larger amount of money if you don’t make a down payment. This means that over the long run, the physician mortgage will cost you more money than a conventional loan. If the interest rate for the physician mortgage is higher than the conventional mortgage, you’ll also pay more interest because of that. This means that the physician loan is generally a more expensive mortgage option.
Ultimately, which type of mortgage is better depends on your financial situation, your ability to afford a down payment, and your long term goals and personal financial plan. The decision isn’t always purely financial. For example, if you have a desire to be debt free or lower your monthly bills so you can cut back clinically, you may be eager to pay down the mortgage as soon as possible and opt for a conventional loan .
Let’s dive deeper into the comparison of a physician mortgage vs. conventional loan below to help you decide.
Physician Loan vs. Conventional Mortgage Loan for Doctors
Down Payment and PMI
PMI typically ranges from around 0.5% - 2% of the entire loan amount every year. For a $300,000 mortgage, this can add around $1,500 - $6,000 additional to your mortgage payments each year.
The good news for conventional loans is that once you’ve reached 20% equity in your home when comparing your home’s current market value versus your remaining mortgage balance, you can get the PMI removed for the remainder of the mortgage life.
With a physician loan, you don’t have to pay the hundreds a month toward PMI… at least on the surface. Note that the bank may make up the difference by wrapping it into the interest rate of the entire loan instead. Since PMI can eventually be removed, having a higher interest rate for the entirety of the loan could make physician loans more expensive in the long run.
Proof of Income
With a conventional mortgage, you provide pay stubs to show you have a steady, reliable income. If you’re a 1099 contract physician, you will likely have to provide proof (usually in the form of previous years’ tax returns) of two years of income with your current business/contract in order to qualify. This is usually true for both conventional and physician loans.
For W-2 physicians, you have the potential to purchase a home before starting your new job. This can be advantageous when moving long distances for a new job or as you graduate residency and plan to start your first attending position. Physician loans will take into consideration a signed employment agreement, even if you haven’t started the position, so that you can close on a home sooner.
Cost of Physician Mortgage vs. Conventional Loan
You should be thinking about the total costs of financing your house, which means considering the total interest paid throughout the term of your mortgage.
The more that you finance, the more total interest you will pay, so physician loans lose out in this regard. Other factors such as the length of your mortgage term and the amount of your interest rate will also factor heavily in how much you’ll end up paying over the life of your mortgage.
Since physician loans may wrap fees such as PMI into the loan interest rate, the interest rate can be higher for physician loans than corresponding conventional loans. A lower down payment also increases the lender’s risk of your house’s equity not building as fast. In stagnant or slow housing markets, this can lead to a higher risk of you owing more on a house than it's worth, making it a riskier investment for both you and the lender. To help cover for this risk, the lender may charge more in interest so they make more off you upfront.
Because you finance a larger amount in a physician loan, you’re also more likely to need a longer term to pay back your mortgage, again increasing the total amount paid in interest.
Compare interest rates when shopping for your mortgage. Our mortgage lender sponsors can help.
Learn more about how to assess the costs of a loan, including examples, on our deciding between 15-year or 30-year mortgages page.
Long Term Financial Goals
If your goal is to be debt free as soon as possible, you will likely want to put down as large of a down payment as financially feasible. Many physicians on a beeline to financial independence will choose this route, and in this case, a conventional loan makes more sense if the interest rates are lower.
However, if you have a desire to invest your down payment or have another need for the money you’d require for your down payment, you may find the added costs of a physician loan well worth it.
We see this question a lot since investing is one of our favorite side gigs to generate alternative income streams for doctors. Depending on your interest rate, it can benefit you to leverage your mortgage to invest more, but there are some important caveats: For one, if you go this route, make sure you actually invest the funds. A lot of times, lifestyle creep takes over and physicians with this plan end up spending the money instead, which leaves you in a worse financial position.
Secondly, note that paying off your mortgage has a guaranteed return on investment, whereas investments carry inherent risk and you should always be prepared for the possibility that you would have been better off paying off your mortgage because you either lost money on the investment or it didn’t yield as high of a return as anticipated. Especially with today’s interest rates, the likelihood of getting a higher return on your investment post taxes than your mortgage payoff are harder to guarantee. Read more about whether you should pay off your mortgage or invest.
Physician Loan vs. Conventional Mortgage: Which is Better For Me?
Physician loans can be a great option for residents, fellows, and early career attendings just starting out in their careers and their financial journey, since physician loans are easier for doctors to qualify for. They’re also great options for physicians who have other uses for the money they’d be needing for the down payment.
Having enough cash reserves to make a 20% down payment to avoid paying PMI should make you consider whether a conventional loan is better for you, especially if it comes with a lower interest rate. If you have enough cash to avoid PMI, consider the conventional mortgage route.
Additionally, if you are closer to financial independence, have built up a good credit score, and have paid off high-interest debt and some or all of your student loans, you could very well find a conventional mortgage the better option. 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.
If you take a physician loan, reassess regularly whether it still makes sense. Few mortgages carry prepayment penalties, allowing you to refinance when it’s advantageous, such as:
Reaching 20% equity in the house
Getting below jumbo limits on your loan size
Improving your credit score to qualify for a better rate
Overall market interest rates dropping
Where Do I Get Started?
Once you know which route you want to go, we’ve partnered with mortgage lending sponsors who have been recommended and used by our physician community members. They can also help you compare options if you’re not sure and need to take a deeper look at the numbers for your specific situation.
Conventional Mortgages & Refinancing Sponsors
Credible: Credible has partnered with Physician Side Gigs to offer options for primary mortgages and mortgage refinancing. Explore options at through our affiliate link. NMLS #1681276, in all states except NV, NY, UT, and WA.
Physician Loan Mortgages Sponsors
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.
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.