Different Types of Doctor Loans: ARM, 15 Year Fixed, and 30 Year Fixed Loans
Did you know that the average neurosurgeon’s salary is nearly $750,000? Orthopedic surgeons are not far behind at over $600,000 on average. Why is it challenging for Doctor Loans to get a mortgage with such high-paying careers?
Medical school isn’t cheap, and when you consider how long it takes to start working, you may find yourself in hundreds of thousands of debt. Unfortunately, not all mortgage lenders are privy to doctor loans.
A few understand that although there is a high amount of debt, physicians will come out on the other side making exceptional salaries. Luckily, we have put together a complete guide on various doctor loans available, how you can qualify, and how to get started finding lenders, so keep reading for more information!
What Are Doctor Loans?
Doctor or physician loans are different than traditional mortgage loans. Once you become a licensed medical provider, you may find yourself in challenging circumstances. You have loads of student debt, minimal income, and potentially low credit scores.
Most medical school graduates have six times the debt of other college graduates. The average student loan debt from medical school is over $200,000. Yet, many banks are starting to realize that physicians have excellent job security, long-term payouts, and salaries.
With these factors in mind, more banks are offering loans or even mortgages for physicians. Physician mortgages offer zero-down or no private mortgage insurance (PMI) rates.
It also eliminates the need for a 20% downpayment on a mortgage. You can still receive a reasonable mortgage rate, without the downpayment or PMI, and afford a home that fits your needs.
What Are ARM Loans?
ARM stands for adjustable-rate mortgages. They are the most popular mortgage type for physicians and health providers. The most common types are:
How can you decide which ARM loan is right for you? It comes down to a few factors such:
- Family size
- Long-term job opportunities
- Residencies or fellowships
Ultimately, if you plan on moving from the area, you won’t want to lock yourself into a longer mortgage. ARMs can offer you longer and cheaper upfront interest rates compared to fixed loans. Yet, while your initial interest may be lower than 30-year fixed loans, it has high variability.
In recent years, interest rates have been sitting at all-time lows. Now that the market has shifted, housing prices are increasing. While fixed interest rates soared above 5 percent, ARM rates increased too.
ARM Loans Pros and Cons
Recent changes and an increase in interest rates highlight the cons of ARMs. They can be much more volatile and are different than fixed rates. You may even see ARMs with a 10/1 ratio. However, ARMs are different, and most function as 5/1 ARM or 7/1.
These numbers indicate the fixed rate and change. For example, a 5/1 ARM means you will have five years at a fixed rate before the mortgage lender can make a change once annually. The 10/1 gives you a fixed rate for 10 years and then can adjust every year after this period.
That is the main risk for ARMs, and you will need to consider if you can pay the maximum increase. There are generally caps on annual adjustments, but it helps to understand a few key terms:
- Initial adjustment cap
- Subsequent adjustment cap
- Lifetime adjustment cap
Initial adjustment caps place maximums on how much the interest rate can increase after your fixed period. Typically, this rate won’t be any higher than two percent. All that means is that after your fixed period ends, your initial increase cannot be more than two percent of what your initial rate was.
Subsequent adjustment caps are the maximum increases after the first year following a fixed rate. Again, if this rate is two percent, your interest rate cannot increase more than two percent for each subsequent year.
Lifetime adjustment caps are the most critical terms to understand in your contract. It is the total increase that a lender can increase your interest rate based on initial rates.
Using current interest rates, if a lifetime adjustment cap is five percent, the final interest rate on your loan cannot be more than 13.5 percent. Each lender will have different amounts, and higher adjustment caps can cause trouble in the long term if interest rates soar.
Popular ARM Loans
Five-year loans are great options for physicians completing a residency. After residency, you may move to a new region for a fellowship or career opportunity. You will not want anything longer than a five-year loan, or you may be stuck with more expenses than you can pay off.
Seven-year loans are ideal for residencies that require longer stays, such as orthopedics or surgery. You may also consider a seven to ten-year loan if you complete an additional fellowship, putting you in the region for longer.
Ten-year loans are ideal for new physicians who have completed residency and fellowships. These physicians have a job opportunity and will remain in the region for the foreseeable future.
Fixed Loans Pros and Cons
The main benefit of fixed loans is security. However, you may have higher monthly payments that make fixed loans unaffordable for new graduates. This concept is especially true for 15-year fixed versus 30-year fixed loans, and you could pay nearly 30% more each month.
If interest rates drop, you will have to refinance your home for a better rate. On the contrary, ARMs can fluctuate with the market, and you could pay less. You can also sell your house before the fixed period ends with an ARM loan.
Fixed loans are ideal if you want a long-term investment. Most come in 15, 30, or 40-year rates. Fifteen-year rates may also be offered as an ARM or fixed loan.
The main difference is whether you want to build equity more quickly or not. However, there aren’t many lenders who will go beyond a ten-year ARM.
Established physicians use most fixed loans. Experts suggest using ARM loans if you plan on remaining in your home for less than ten years.
15 Year Fixed Loans vs. 30 Year Fixed Loans
The biggest difference between a 15 and a 30-year fixed loan is how quickly you pay it off. Fifteen-year loans will be paid off in half the time, and you will accrue less interest.
They tend to come with lower interest rates but higher monthly payments. Thirty-year fixed loans will still provide lower interest rates and monthly payments.
Over the loan period, you will pay more money on interest and total payments. It can be a better option for homeowners who want a long-term home with lower costs. If you are a more seasoned physician with a high monthly income, you might be better suited for a 15-year loan.
What Are DTIs?
DTIs are debt-to-income ratios. Ultimately, it is the monthly debt you owe compared to income. Debt could include:
- Other mortgage payments
- Credit card debt
- Personal loans
- Student loans
- Car loans
Unfortunately, DTIs are what hinder many physicians from receiving traditional mortgages. The high rates of debt do not offset the income, and it could take years before that number starts dropping. Doctor loans function differently.
They consider monthly payments and income for student-specific scenarios, making loans more affordable and helping new physicians or healthcare providers qualify for mortgages. DTIs for physicians are used based on monthly payments through income-driven repayment plans (IDR).
IDRs are designed to help with federal student loans. They calculate your monthly income and family size, offering lower monthly payments than a traditional loan. These loans are forgiven after a set period (usually 20 to 25 years).
Nearly one-third of student loans fall under an IDR. If you have used an IDR, it could drop your DTI score and make a mortgage more affordable for you.
How To Determine Loan Amount
One of the main benefits of physician loans is there are no price caps. Typically, mortgage lending has a borrowing cap of around $650,000 to $980,000. Many physicians reach this price cap, especially with soaring housing prices.
Growing families need more space and you want a house that fits your dreams. Instead, physician loans do not have lending caps. You won’t accrue additional charges for exceeding or meeting traditional lending cap prices.
And you won’t suffer from higher ARMs. More expensive homes will still have limits on fixed and adjustable interest rates. Here are some general rules of thumb to determine how much of a mortgage loan you can afford:
- Annual salary
- Monthly income
Consider your (and your partner’s) annual income. For example, if you have a combined annual income of $200,000, the maximum mortgage you should take out is $400,000. Opting for a larger mortgage is still doable, but you may have less room for an emergency savings fund or other expenses.
Monthly income rules operate similarly and are probably more idealistic on how much of a loan you can afford. Your monthly mortgage costs should be under 28% of your monthly income. When calculating these numbers, use your gross monthly amount.
Approximately 50% of your monthly income should account for:
If your mortgage is close to 50% of your income, you may be pushing it to make ends meet. Some experts claim that you can get a mortgage that is three times your annual salary. There are pros and cons to this.
First, it will allow you to afford homes in higher-cost-of-living areas. If you make a combined $200,000, you could afford something closer to the $600,000 range. If you have other financial goals this may not be as realistic.
How To Improve Your Interest Rates
There are a few strategies you can start using to improve your chances of getting the lowest interest rate possible, including:
- Proof of degree or education
- Proof of employment
- Future salary contracts
- Good credit score
- Good standing in student loans
How can you build a good credit score during and immediately after school? The easiest way to start doing this is using a credit card. Ensure you pay off your monthly payments regularly to avoid hefty fees and lower your score.
Missing payments is a quick and detrimental way you can plummet your credit score and cause you to miss out on lower mortgage interest rates. Other services may allow you to use your student loan repayment plans to help generate better credit scores.
Can You Get a Physician Loan With Other Degrees?
In one word – yes! Physician loans aren’t limited to medical doctors. Other qualifying degrees include:
Unfortunately, each lender may operate differently, so it is important that you shop around first on what degrees are required for physician loans. The most available is for an MD or DO degree.
Chiropractors, optometrists, and veterinarians may have stricter regulations and fewer options. Allied health professionals, physician assistants, or nurse practitioners are even more limited. It helps to ask a lender if they have specialized mortgage loan agreements for your degree and inquire about their rates.
In addition to your degree, you will need a credit score of 700 or higher (in most cases). Contact us if you have a 680 so we can find a lender to help.
How Can You Find Lenders?
DrHomeFinance is a service that helps physicians (and other medical providers) find valid mortgage lenders. We take the burden out of finding mortgage lenders yourself and streamline options.
Some of the key characteristics that DrHomeFinance looks at are:
- Mortgages are offered by banks (rarely are they sold by third parties)
- No downpayment
- No PMI requirement
- Higher loan limits (up to $2 million)
- 30 to 90-day closing
DrHomeFinance suggests that you compare the costs and rates of at least two lenders. Check into refinancing options and consider how long you need to stay in your home. The ideal timeframe is at least five to seven years.
In some instances, doctor loans are available up to ten years after graduating. Remember that this will need to be your primary residence – you cannot use it for a vacation home. After using the loan locator tool, you can decide on the profiles you like best and contact them for an online quote.
Finding Mortgages for Physicians
You can find doctor loans through an online tool like DrHomeFinance that compares multiple lenders for you. Simply select which state you are looking at living in and compare the rates of a few popular mortgage lenders.
The benefit of using DrHomeFinance is that these lenders already work closely with physicians on mortgages, saving you time calling multiple lenders to ask about rates.
A quality doctor loan can help you find the house of your dreams while offering lower payments and interest rates. Check out our website and find a lender in your state today!