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April 6, 2022 0 Comments

How Doctors Can Qualify for Physician Loans

You spent years with your main focus on getting through medical school and into a fellowship or residency. Now your career is on the fast track and you want to take the leap into homeownership. The best way to qualify is by applying for physician loans.

Why a physician loan? The average medical school graduate has student loan debt six times higher than the average college graduate. Most lenders use student debt against you and consider you a poor credit risk.

Lenders of doctor loans know that despite student loan debt of about $241,600, you are a good credit risk. That is because even without a long employment history you have tremendous potential to earn.

Physicians have one of the highest-paid occupations and are less likely to default than other borrowers. Mortgage lenders handling physician mortgages know the average doctor earns $100 per hour or $208,000 per year. The lender operates on the belief that if they provide you with a much-needed mortgage now, you will contact them if you need another loan in the future.

If you are wondering what you need to do to qualify for a physician loan mortgage, read on. We’re going to share everything you need to know to secure a loan on your dream home.

Physician Loans Degree Requirement

To qualify for physician loans you must have the proper degree.

  • Dentists (DDS, DMD)
  • Medical Doctors (MD, DO)
  • Optometrists (OD)
  • Podiatrists (DPM)
  • Veterinarians (DVM)
  • Ophthalmologist (DO)
  • Chiropractic (DC)

If you have any type of medical degree, you can inquire on whether a lender has a custom program exclusively for physicians. Not all lenders accept all degrees, so use (DrHomeFinance.com) to shop around if one lender declines you.

For those of you who hold the title of Ph.D. but are not a physician, your degree does not meet the degree requirements.

Medical Doctor

If you hold an MD or DO degree, you have the widest range of mortgage companies available to you. While there are more than 40 banks and mortgage companies that claim they offer doctor loans, you want to make sure you go through a service that offers a true doctor loan with all the benefits.

Make sure the Banker is a Dr. Home Finance Verified Lender- you will find this seal within their profile or in their email signature. 

Dentists

Dentists holding a DDS or DMD degree may not qualify for every physician loan program. There are some lenders willing to grant you the perks of a physician mortgage.

Some lenders accept only a DDS or a DMD, but not both. Shop other lenders to find a bank accepting your degree.

Chiropractors, Optometrists, Pharmacists and Veterinarians

These are specialized areas and fewer lenders offer white coat loans to your profession. It never hurts to make an inquiry. Depending on your DTI ratio and credit score, they may be willing to make an exception.

Physician Assistances, Nurse Practitioners, Nurses

This is outside of most physician lenders but ask your banker if your profession has any special program or discounts, even if not a listed degree on the lender’s criteria, inquire on whether they will accept your degree.

Physical Therapists, Occupational Therapists, Other Medical

Those who work as occupational or physical therapists, acupuncturists, pharmaceutical reps, and medical technicians will need to do more legwork. There are some lenders that will give you a discount based on this profession. Ask around. 

Check each lender’s page completely. You may need to make personal inquiries asking if they will be willing to help you.

Credit Score

Most lenders handling mortgage loans for doctors will accept a credit score as low as 700. Some will go as low as 680 if you have 6-12 months of cash reserves.

If your credit score is lower than 680, you need to work on building your credit score. Begin by paying off all credit cards, but keep them open. Closing credit cards lowers your credit score.

Pay off your debts and your score will begin to climb. If you charge purchases, pay them off each month to show good money management. You can watch your score progress upward by using a free service such as Experian or Credit Karma.

Debt-To-Income Ratio

The debt to income ratio is a measurement of the amount of money you earn versus the amount of debt you have. The standard for traditional lenders is a DTI of 43% or lower. This is an important requirement because those with less debt are more likely to make timely loan payments.

To calculate your DTI add up all your monthly debt payments. You then divide that amount by your gross monthly income. Your answer is in a percentage, which is your DTI ratio.

For example, if you have a total monthly gross income of $12,000 and monthly expenses of:

  • $3,000 per month for rent
  • $800 per month for a car loan
  • $600 per month for credit card debt
  • $1,000 per month for a student loan 

Total monthly output is $5,400

$12,000 gross income ÷ $5,400 debt = 45% DTI ratio

Because of your large student debt, you may have a lengthy period of time before you can meet the standard DTI requirement. Providers of physician loans realize this problem and have a more lenient DTI requirement.

If your student loans are on an income-dependent repayment (IDR) program, you receive special consideration when applying for a physician mortgage.

Ability to Repay Rule

The ability-to-repay rule is a determination the majority of mortgage lenders use in determining whether an applicant has the ability to meet the payment obligations of the loan.

In making a reasonable good faith determination, the lender takes into consideration the income, assets, employment, credit history, and monthly expenses of the applicant. This is essentially the application of your DTI.

With a physician loan, lenders recognize that those in the medical profession have a very high potential of increasing their income and paying off debt quickly. Doctors have an estimated loan default rate of roughly 0.2% vs the average consumer default rate of about 1.2%.

No Proof of Income

When applying for a doctor mortgage loan you do not need to meet the standard employment requirements of a traditional mortgage. Traditional mortgage lenders require recent paycheck stubs and a copy of your W-2.

They may also require two years of tax returns to prove you have a stable, consistent income at a sufficient amount. The mortgage company may do verbal verification of your employment by contacting your employer.

Lenders providing the best physician loans realize you will be working in a fellowship, residency, or internship. They will accept a contract for employment as proof of employment and income. 

No Down Payment and Higher Loan Amount

If you’ve been shopping for a mortgage at local banks, you are probably getting hit with the demand for a 20% down payment. Even if you have a few years of work under your belt, you likely haven’t been able to save sufficient funds to meet that requirement.

Physician mortgage loans are usually available for a zero down payment. This means you can qualify for white coat loans right out of medical school.

Physician loans also have a higher loan limit. Many lenders will loan you 95% to 100% for a home mortgage of up to $1 million. If applying for a $2 million mortgage they will usually finance up to 90% of the home value.

No PMI

Most banks will require those making low to zero down payments to pay private mortgage insurance (PMI). This is insurance you pay to protect the lender. If you stop making payments on your mortgage the insurance covers the lender’s loss.

Traditional lenders usually require PMI for any mortgage where the down payment is less than 20%. The average cost is 0.25% to 2% of your loan amount every year.

The rate is based on your risk factors. The higher the risk, the higher your PMI percentage. The borrower pays the insurance to compensate the lender for taking a risk by loaning funds with a low down payment, high DTI, or low credit score.

Your payment for PMI is part of your monthly mortgage payment. Because the percentage you pay is against your mortgage balance, the higher the mortgage, the higher the payment.

The lender collects PMI insurance until your equity in the home reaches 20%. Once you have 78% or more equity in your home, the lender has an obligation to cancel your PMI. You must have your mortgage payments current for PMI cancellation.

If a lender fails to remove PMI when you qualify, they are in violation of the Federal Homeowners Protection Act.

Mortgage loans for doctors do not have a PMI requirement. Not having to pay this insurance can save you hundreds of dollars every month, depending on the size of your loan.

Property Requirements

A doctor loan is only available for buying or refinancing a primary residence. You must live in the home you use a physician’s loan for. This type of mortgage is not available for financing investment property, a vacation home, or a second residence.

Early Closing

The best physician loans will allow you to close on your mortgage prior to beginning your job. With an employment contract, you will be able to close on your mortgage 30-90 days prior to starting work. This gives you the advantage of moving in and getting settled before you start working.

Connect With a Banker

When trying to make a decision on whether or not physician loans are a good choice for you, contact a Banker. This professional provides their services for free. They help you narrow down the best loan option for you based on your individual needs.

Considerations include the size of the loan you can comfortably manage, length of mortgage for lowest long-term expenditure, and interest rates and fees. They will help you locate a selection of lenders where you can apply.

You Need DrHomeFinance.com

When shopping for physician loans, DrHomeFinance.com provides you with free tools and professionals who help you search for an affordable mortgage. You can easily review the physician loans available in your area and complete the application process.

Don’t hesitate, apply now for your physician loan and get one step closer to owning your dream home.