Doctor Mortgage Lending Guide: The Top Things to Understand
If you have been trying to secure a loan and are running into brick walls because of your high debt-to-income ratio, you are not alone. Banks handle mortgage lending on a “one size fits all” basis, without considering the unique circumstances allowable with a “Doctor Mortgage”.
You likely have a lower salary during your residency or fellowship, a lower-than-average credit score, and high student loan debt. You may not be working, but you have the guarantee of a job you have not begun. A traditional mortgage lender will not accept that as proof of income.
A recent study found that 65% of doctors owe student loans, and 32% owe more than $250,000. About 50% of doctors paid off that debt within two years following graduation. This high level of debt makes you a credit risk to most lenders, not to us, we understand 🙂
While the above facts scream “reject this application” for a traditional bank, you have the benefit of applying for an exclusive doctor mortgage loan. If you’re tired of loan rejections and want to get the keys to your dream home in your hands, keep reading.
What Are Physician Mortgage Loans?
A physician loan is an exclusive homeowner’s loan only available to medical professionals. They are easier to qualify for because they depend on the estimated future earnings* of the applicant.
Lenders realize that as a resident or fellow you are working at a considerably lower salary than you will be earning within a few years. The great news is that you can apply with only an offer letter of employment as proof of income.
Doctor Mortgage Loan vs. Physician Mortgage Loan
You may hear of physician mortgage loans and doctor mortgage loans and wonder what the difference is—they are the same.
These loans are not exclusive to medical doctors. Other professions in the medical field also can qualify, including dentists, orthodontists, and veterinarians. If you practice in any area of the medical field, it may be beneficial to see if you can qualify for this special mortgage.
Why Do Doctors Get Special Treatment?
As a doctor, you have a unique advantage when borrowing money. Although you may not have a long-term employment history, you have enormous earning potential.
The average physician now earns a salary of $208,000 per year or $100 per hour. It is one of the highest-paid occupations. About 22,700 openings for physicians and surgeons are anticipated to open every year between 2020 to 2030.
This makes you a good credit “risk” for lenders. Doctors have a lower default rate than other types of borrowers. This creates a win-win for you and the lender, allowing you to develop a relationship with the anticipation you will look at the same lender for any other loans in the future.
Benefits of a Doctor Mortgage
One of the key benefits of physician loans is you do NOT need the 20% down payment that conventional mortgages require. In many instances, loans for physicians are available with no down payment.
When fresh out of medical school it can take a considerable amount of time, sometimes years, to save the down payment necessary for a traditional lender. If you do have money for a down payment, with a loan for physicians you will be able to put down as little as 5-10%.
A traditional lender will usually charge huge fees and attach other costly fees to a loan with a low to zero down payment. This is not the case with a “doctor mortgage”. The additional benefits of a physician loan can save you thousands of dollars.
A mortgage lender normally requires proof that you are working and have a regular income. Notification that you will be starting a job soon does not meet their proof of income requirements.
Physician loan mortgage lenders allow you to satisfy income requirements by showing an employment contract. This is acceptable even if you have not begun your residency.
Many doctors spend the majority of their 20s and 30s in college, medical school, internships, fellowships, and residencies, making it harder to qualify for a mortgage. Use the doctor mortgage option to begin home ownership early in your career.
A traditional mortgage lender will generally require someone with a low down payment to pay for Private Mortgage Insurance (PMI). This is insurance you pay that benefits the lender if you stop making mortgage payments. This insurance is also a requirement when refinancing with equity less than 20% of the total home value.
The average PMI cost is between 0.3% to 1.2% of the mortgage. The PMI requirement remains until you pay off 20% of your mortgage, which may take years. The insurance premium is added to your monthly mortgage payment.
Some traditional mortgage lenders will give you the option of paying your PMI in full upfront. Be aware that if you take this option and later refinance, you cannot get a refund for the unused insurance.
One of the benefits of physician mortgage rates is that you can sidestep the PMI requirement. The best physician loans come from lenders who realize your earning potential and do not penalize you for your current circumstances.
Debt to Income Ratio’s Impact on Doctor Loan Eligibility
If you apply for a conventional home mortgage the bank will likely require a Debt to Income (DTI) ratio of 43% or lower. Your DTI helps lenders determine how much of a risk you are if they loan you money. The DTI calculations compare how much money you owe every month with how much you earn.
You can determine your DTI by adding up your monthly bills. This includes your rent or house payment, any alimony or child support payments you make, your auto, and student loan, any other monthly payments you make, and the minimum payment due on each of your credit cards every month. Include any other debts you have.
You then take the total of your monthly bills and divide it by your gross monthly income (the amount you earn before taxes). The result is your DTI in a percentage. When figuring out what you qualify for, keep in mind that the calculations do not take into consideration utilities, gas, groceries, or taxes.
When applying for a “doctor mortgage” your student loans are less of the picture when it comes to your DTI calculations. That is because your doctor loan DTI uses the monthly payment made through an Income-Driven Repayment Plan (IDR) rather than the total amount of your loan. That means your monthly student loan obligation is based on your income and family size.
Physician Loan Limits—No Caps
When applying for a traditional mortgage, there is generally a borrowing cap of $647,200 to $970,800 in 2022. The limits are set each year by the Federal Housing Finance Agency (FHFA), which determines the amount you may borrow when applying for a conforming loan, better known as a regular mortgage.
A “doctor mortgage” does not have the traditional lending cap, which allows you more flexibility in selecting your dream home and obtaining financing. They are also exempt from any additional charges typically applied to those taking out a jumbo mortgage.
In addition to a mortgage cap, there is a payment cap that safeguards the price of your monthly payments on an adjustable-rate mortgage. This prevents you from encountering payments that drastically increase.
The interest rate cap limits interest rate increases on a variable-rate loan. This floating interest rate is usually found on variable-rate mortgages and adjustable-rate mortgages (ARM). This protects the borrower by setting a ceiling for a maximum interest rate.
Physician Loan Interest Rates
When applying for a “doctor mortgage” you may find the physician mortgage rates to be equivalent to conventional jumbo mortgage rates.
Jumbo mortgages are financing that exceeds the Federal Housing Finance Agency limits. The main purpose is to finance luxury property and homes located in highly competitive real estate markets.
Jumbo mortgages come with rigorous credit requirements and usually have an APR equivalent to a conventional mortgage with a 10-15% down payment.
Your FICO Score
Your FICO score impacts the interest rate you receive. With a “doctor mortgage”, you are usually able to qualify with a credit rating of 680 or better. The higher your rating, the lower the interest rate you receive.
Shop interest rates by obtaining quotes from different lenders offering doctor mortgages. You can then make an informed decision on what mortgage meets your needs.
Have comparisons run on financing with a 30-year, 15-year, or 10-year mortgage. The difference in the total amount you pay is shocking. It is best to take out the shortest mortgage length you can afford.
In addition to the above benefits, a doctor’s mortgage loan usually has no pre-payment penalty. This is often not allowed on a standard mortgage.
You will be able to select from flexible loan options and close your home up to 90 days before you begin your employment. This helps reduce stress for you and your family.
Physician Loan Disadvantages
The benefits of a doctor’s mortgage are obvious: no down payment, fewer fees, and lower requirements. There are some disadvantages to consider.
The majority of doctor mortgages have a variable interest rate. This means your interest rate is not fixed and will be adjusted throughout the mortgage. This is often done using a hybrid method, called an adjustable-rate mortgage (ARM).
With an ARM, you have an initial period where your interest rate is fixed. When that period expires the interest rate will be periodically adjusted to meet current market percentages.
A 5-year ARM is standard. If you plan to stay in your home longer than five years, you will likely want to refinance at that time to lock in your interest rate.
The ARM interest rate is usually comparable to a jumbo mortgage from a traditional lender. This does vary among lenders so it is important to shop around.
A doctor’s mortgage is only available for a specific type of home, which must be your primary residence. You are unable to use this option if looking to buy a vacation home or rental property.
Qualifications for a Physician Mortgage Loan
To be eligible for a doctor’s mortgage, you will need to meet the following criteria:
- Medical resident, fellow or attending physician, dentist, or veterinarian
- Proof of education/degree
- Signed employment contract showing future salary
- A credit score of 680 or above (ask us about this if your score is lower)
- Student loans in good standing or deferred
- DTI ratio of 50% or less (not including student loan debt*)
When you receive a doctor’s mortgage”, your monthly payment will consider the principal, interest, taxes, and insurance. You may also have homeowners association fees as part of your monthly payment, depending o”n the home location.
Physician loans are available for purchasing or refinancing your home. They are not an option for a second or vacation home. There is a possibility a lender will approve the purchase of a multi-unit building as long as you use one of the units as your primary residence.
The best way to determine the specifics of your qualifying loan limit and interest rate is to obtain a quote by using a doctor’s home finance service.
Where to Find a Doctor Mortgage
You need to find a reputable lender that specializes in doctor mortgages. Our site lists the top lends with this focus within the United States that provide physician mortgage loans:
Not all lenders are available in every state, and a purchasing assistant can help you determine what loan options meet your needs.
Once you have decided on the best mortgage options for you, Dr. Home Finance will connect you to loan specialists at the above banks to get you on your way to owning the home of your dreams.
DrHomeFinance.com helps you compare lenders in your area that offer doctor mortgage programs. Don’t be fooled by lenders who are using the term “physician mortgage” but don’t offer full program benefits. True physician loans are through banks, the bank holds the mortgage and it is rarely sold to another lender.
We encourage you to apply now for a physician mortgage loan. Reach out to one of our lenders and we will answer your questions and take your application over the phone.