Doctor loans – Everything You Need to Know About loans
You’ve completed medical school. You’re proud of your accomplishments and look forward to helping people and starting your profession. As you catch up with other colleagues from school, someone comments they just bought their dream home using Doctor Loans.
How the heck did they accomplish that? You’re still struggling with student debt. Banks are laughing you out the door when you apply for a loan.
As other classmates struggle to pick their jaws up off the floor, you bite the bullet and ask. The answer: “have you ever heard of physician loans?”
Others lean in to listen as you ask, “how do you get a physician loan?”
Keep reading to learn everything you need to know to get the best physician loan available in your area.
Banks Get Smart
The doctor mortgage loan is the brainchild of a few smart banks. Those banks realize physicians have a unique group of challenges when trying to get a mortgage.
You’ve spent 10-14 years completing college, medical school, and your residency. Now a fully licensed doctor you have a low credit rating and a bad debt-to-income ratio, mostly because of student loans.
The cost of medical school has increased considerably faster than inflation. The result is most medical school graduates owe six times more than other college students.
In 1978 medical school debt was about $13,500, which with an inflation adjustment is equivalent to $53,648 today. In 2022 the average medical school graduate owes just under $216,000 in student loans—no wonder you have trouble getting a mortgage!
Over time some banks realized that doctors have a strong earning potential, and they are likely to increase their income over time. They came out with physician loans offering minimal requirements, a zero down payment, and a credit score of 700 or above.
Down Payment And PMI
If you’ve been checking the loan types a traditional lender has available, you know what a struggle it is to meet their eligibility requirements. The biggest roadblock is their demand for a 20 percent down payment. If they take a lower down payment, they hit you up for private mortgage insurance (PMI).
With PMI the bank adds a monthly insurance premium to your mortgage payment. This is the mandatory coverage you must pay for the privilege of receiving a mortgage while banks consider you a high credit risk. If you default on your mortgage the PMI covers the loss.
The amount of PMI you pay depends on the amount of your loan. PMI is a percentage that usually falls between 0.5 and 1.5 percent of your loan. The bank will continue to collect PMI until your equity in the home reaches 20 percent. This can add up to a sizeable chunk of change.
For example, you have a 30-year, 4.0% percent fixed-rate mortgage on a $650,000 home, with a monthly mortgage payment of $3103.00 for principal and interest.
The bank is collecting PMI of 1.0% percent, which adds up to an additional $6,500 per year (1.0% percent x $650,000). The monthly amount of $541.67 ($6,500 ÷ 12) will be added to your monthly mortgage payment, increasing your monthly mortgage amount to $4,264 with escrows ($1,161).
While it may not seem costly initially, consider how long it will take you to pay the $130,000 in principle necessary to remove the insurance. You are looking at roughly 10 years of PMI insurance, or an additional cost of $65,000 for your home.
Enter the doctor’s mortgage—no down payment and no PMI.
Physician Loans Down Payment
It is always beneficial to make a down payment if you have cash on hand. This is not necessary with a doctor’s loan. Whether putting down less than 20 percent or going with a zero-down mortgage, there is no PMI.
You receive a good interest rate, usually at the same level as a traditional jumbo mortgage. Jumbo loans are for those purchasing property that exceeds the limits of a conventional loan.
For 2022 the maximum amount for a standard mortgage loan is between $647,200 to $970,800 depending on the property location. A jumbo mortgage applies when the loan amount exceeds the maximum standard for your area. With traditional financing, a 20 percent down payment is mandatory for a jumbo mortgage.
Current jumbo mortgage interest rates are similar to the conforming mortgage rates. This means you will receive an excellent interest rate on your doctor’s loan.
As a double bonus, doctor loans do not have borrowing caps. This allows you to purchase a considerably larger home than those using traditional paths. Interest rates do not increase when you purchase a larger home.
The median cost of a home varies depending on the state where you live. If you are lucky enough to be in Hawaii, the median home price is $638,388. A $200,000 home in that state gets you a whopping 421 feet of living space.
In the contiguous 48 states, the average $200,000 home will be about 2,140 feet. West Virginia has the lowest median home price at $107,927, and California’s median home will run you $505,000. Locations with higher housing costs usually have higher incomes.
Financing with a doctor’s mortgage will allow you to move into a home that fits your dreams. Before jumping into a million-dollar home, consider whether that is the best way to maximize your salary. You don’t want to be paying for a large home and not have enough money to enjoy life.
What Is an ARM?
Doctor loans are adjustable-rate mortgages (ARM). These are usually on a 5-year ARM. This means for the first five years your interest rate is fixed.
After the 5-year period, the interest rate will become adjustable. The interest level adjustments are made up or down, depending on the current market.
When reading your purchasing documents, you need to understand the terminology pertaining to this type of loan:
- Adjustment Frequency—the time between interest rate adjustments
- Adjustment indexes—what the interest rate adjustments are tied to, such as CDs, treasury bills, etc.
- Margin—the rate you agree to pay that is a specific percentage above the adjustment rate
- Cap—the maximum amount the interest rate can increase at each adjustment
- Ceiling—the highest level the adjustable interest rate can reach during the life of the loan
Many who use a physician loan to finance their home will refinance to a fixed-rate mortgage before the variable interest begins. With a fixed rate, your interest rate is locked in for the life of the mortgage.
When refinancing you may have enough equity in your home to qualify for a traditional mortgage. You can also apply for refinancing with a doctor’s loan.
If you apply for a mortgage through a traditional lender, they are going to require a debt-to-income ratio of 43 percent or less. The DTI is a percentage that indicates how much of your monthly income must go toward paying your debt. This is how a mortgage company determines how risky it is to lend you money.
To figure your own DTI add up your total monthly debt and divide that number by your monthly gross wages. The calculation does not include utilities, food, or payroll deductions.
The type of debt you include will be rent or mortgage payments, credit card debt, personal loans, car loans, and student loans. Include monthly payments for things such as child support or alimony.
When you complete the math the answer is your DTI percentage. If you have $2,700 in monthly expenses and bring home $6,000 per month, your DTI is 45 percent.
When you apply for a traditional mortgage, the lender will include your full student loan debt in the calculations. This throws the DTI for most medical professionals well over the acceptable level for many years.
Doctor loans only consider your total monthly payment made through an income-driven repayment plan (IDR) when figuring out your DTI. Income-driven payment plans set your monthly payment at an affordable level. The rate takes into consideration your monthly income and family size.
How To Qualify
There are a variety of loan types, but their computer-generated criteria do not take into consideration your degree. That is what makes physician loans different. If you don’t have the right degree, you cannot join this elite group of borrowers.
You will need a medical degree. Doctor mortgages are available to those with an M.D., D.O. DDS, DMD, or DVM. The lenders are recognizing that others in the medical field are also good credit risks.
If you have a DPM, DPT, PT, PA, OD, DC, DNP, CRNA, NP, or RN check with doctor loan lenders. They may be willing to accept you into the program.
In addition to your degree, you will need to be a medical resident, dentist or veterinarian, fellow or attending physician. As proof of employment and income, the lender will accept your signed contract of employment.
Other requirements include a DTI of between 43 to 45 percent, including your monthly student loan payment. You will also need to have a credit score of 700 or above. Some lenders will accept scores that are a bit lower, so shop around.
For more information on qualifying for physician loans, contact a verified Banker to discuss your options.
With a traditional mortgage, lenders usually require a credit score of 620-640. The downside is they are likely to charge you a higher interest rate. They will also require you to pay PMI to guarantee your loan.
When using a physician loan, lenders usually finance with a credit rating of 700, but some take a lower score (contact us if you are closer to 680 and we can help with some options).
You will not take a hit on the interest rate, nor pay PMI to receive financing, even with a zero down payment.
If you have a low credit score, you may want to seek financial assistance or consult with a debt consolidator to work on improving your credit. One step you can take to boost your score is to sign up for Experian Boost.
This service is free and gives you credit for paying your utilities, phone bill, and streaming services on time. These are payments that normally are not taken into consideration when computing your credit rating.
If you are carrying credit card balances, work to get the balances paid down. Pay off the cards, but do not close the accounts. When you close credit card accounts it lowers your credit score.
If you have credit cards with zero balance, use them each month and then pay off the balance in full. This shows a history of responsible money management.
Watch your credit score and learn what impacts the numbers by signing up for free monitoring services such as Experian and Credit Karma.
Monthly Physician Mortgage Costs
With your physician mortgage there will be several items that make up your monthly payment:
- Principal—portion of the total amount you borrowed
- Interest—mortgage interest on your loan
- Insurance—homeowner’s insurance
- Taxes—property taxes
Taxes and insurance are placed into an escrow account the lender manages. When your tax and insurance bills come due the mortgage holder pays them out of your escrow account.
You will receive proof of payment to use for taking appropriate deductions on your federal income tax return.
When using a doctor’s mortgage you can only purchase or refinance your primary residence. You must reside in the home for the majority of the year.
If you own real estate in more than one location, your primary residence is the one where you:
- Register to vote
- Address on your state and federal income tax returns
- Address on your driver’s license and car registration
- Address on file with the U.S. Postal Service for mail delivery
This is the property that provides you with the most tax benefits when filing your income tax each year.
Loans for doctors purchasing an investment property, second homes, vacation property, and sometimes condominiums will not qualify.
Where To Find A Physician Mortgage
Every state offers doctor home mortgages from one or more lenders. We list the best banks that help with physician mortgages as well as qualify the bankers. Look for the “Dr. Home Finance Verified” sealed on their profile.
Some banks will claim they offer physician loans, but they do not offer the full benefits that the above lenders do. You can easily link to lenders in your state to learn their loan criteria and apply for a mortgage.
Apply For Physician Loans Now
If you are tired of dumping money into rent with no benefit of equity, check out at DrHomeFinance.com. We are not a lending company. We help you find the best physician loan lenders that meet your needs.