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What is a Physician Mortgage Loan?

A physician mortgage loan is a type of home loan that has been designed with doctors in mind because of our unique situation. These are mortgage loans with little or no down payment, no PMI (private mortgage insurance), relaxed debt-to-income ratios (DTI), and higher loan balances.

Coming out of residency with a huge student debt that has been in deferral for years combined with barely enough salary to scrape by suddenly changes when we get a “real world” job. Now, salary will increase, but most of us must move to another city for that job.

See the problem?

How can you qualify for a mortgage that you will be able to pay for based on your residency level salary which was maybe only twenty percent or less of what you will be earning going forward?

This is how a physician mortgage loan may help you qualify for your new home.

Physician Mortgage Loans: Designed for the Needs of Physicians

Most home mortgages require a substantial down payment often at least 20%. If your down payment is at least 20% then you can avoid paying PMI which is a significant cost over time. Most physicians just out of residency or are early in their practice do not have a sum of money to put down on a large mortgage especially as they are having to pay for significant student loans which have been in deferral for years.

Physician mortgage loans are no or low-down payment mortgage loan alternatives for jumbo loan balances. There are some lenders offering no down payment and others offering 5% or 10% down depending on loan balance. Interesting that there is a wide variety of plans, and these differ from one state to another so research will be required to become knowledgeable what is available in your area.

Another good feature of these loans are they typically offer more flexible qualifications than other mortgage loans.

It is common knowledge with regular home mortgage loans there are certain restrictions on these loans and guidelines that must be followed to qualify for a typical loan.

One of these is the amount of income a borrower has after deducting their mortgage payment, certain taxes, homeowner’s insurance premium, and other debts (student loans) from their total pay.

Physician Mortgage Loans and DTI

The higher one’s debt-to-income (DTI) ratio, the more likely it is that they’ll fail the application process. However, there are exceptions to this rule for physician mortgage loan programs because they can sometimes get away with having more debt than some other types of occupations due to job stability and earning potential.

With physician mortgage loans, student debt is not considered as it would be with conventional loan requirements. Many lenders adjust the ratio requirements in consideration of the debt-to-income ratio or dismiss the student loan debt all together when considering the DTI on a physician mortgage loan. This alone can be the one thing that allows some physicians to purchase a home whereas they may not be able to qualify for any other type of loan.

As I mentioned earlier, going from residency salary to real world salary being a problem when applying for a mortgage you will be able to make payments on, then submit your earnings report from your resident level salary over the past year or years – good luck qualifying for a regular conventional mortgage!

Suffice it to say you may want to think twice about buying a house before making sure your finances are properly in order. When considering any home loan mortgage, it is important to make sure you can afford both the mortgage payments, new expenses, and your student loan payments. It’s also a good idea to consult with a financial professional and go over your financial goals and get recommendations before you start your search for a new home mortgage.

5 Things to Know About Physician Mortgage Loans

  • The interest rate for most physician mortgage loans is slightly higher than conventional loans. There are several reasons for this, but zero or a lower percentage down payment and no PMI comes at some cost.
  • A physician mortgage loan does not have a maximum loan to value ratio. You can finance up to 100% of the purchase price of the home with some lenders.
  • Loan fees, origination fees and points can be included in a physician mortgage loan’s closing cost.
  • The underwriting process for these loans is straightforward and quicker than for some conventional loans, but there can be hidden pitfalls in these loans so the lender one chooses is very important.
  • These loans are not as difficult to qualify for as conventional loans as mentioned earlier, but there is a fair amount of requirements such as credit score, current and previous financial status documentation including debt analysis, tax information, and future income verification. You will also have to submit your new employment contract as verification of future employment and income.

Physician Mortgage Loans: Flexible Qualification Requirements

Physician mortgage loans are not limited to one type of medical professional, but rather these mortgage loan programs often include: MD, DO, DMD, DDS, DPM, DVM, DC, OD, and a few others. You will need to check the various loan programs for categories included. If you fit into one of these categories and have an income that can be documented on tax returns, pay stubs or W2 forms then you may be eligible.

Physician Mortgage Loans and PMI Requirements

When it comes to PMI (private mortgage insurance), these loans do not require you to carry this coverage even if putting down less than 20%.

Most conventional loans require borrowers to carry PMI and charge additional monthly premiums for the coverage since it protects the lender against what would happen if a borrower defaulted on the loan. By eliminating PMI from requirements, this saves physicians thousands of dollars over the life of their mortgage loan.

Can You Get a Physician Mortgage Loan if You Have Filed Bankruptcy?

You can apply for a physician mortgage loan even if you have filed bankruptcy in the past.

While it is possible to get a conventional loan with a bankruptcy on your record, other types of loans such as FHA and VA loans require waiting at least 7 years before applying after filing for this type of debt relief.

However, physicians only need 2 years before they can apply for a physician mortgage loan after filing bankruptcy.

How Much Can You Borrow with a Physician Mortgage Loan?

There is often no limit on how much money you can borrow with a physician mortgage loan. As stated earlier, you can borrow up to 100% on some loans up to a certain value and there may be multiple value ranges where you must put 5% down up to a certain value and so forth. Some lenders may allow more flexibility than others so again research will serve you well.

Most physicians have incomes which are very stable so lenders know they will generally get paid back on time and in full even if something unexpected comes up such as job loss or taking several months off from work. This allows for physician mortgage loans to offer more favorable loan terms.

Physician mortgage loans are often for amounts higher than what conventional or FHA loans allow. Thus, they are referred to as jumbo mortgages. The amount borrowed for these loans are dictated by the individual lenders who underwrite for them so you will have to research and compare the pros and cons of each lender’s product.

I must include the usual disclaimer, which is obvious, but when considering any home loan mortgage, it is important to make sure you can afford both the mortgage payments, new expenses, and your student loan payments. It’s also a good idea to consult with a financial professional and go over your financial goals and get recommendations before you start your search for a new home mortgage.

What Are the Benefits to the Lenders?

You may be wondering why lenders would offer physician mortgage loans. There are a few benefits for them as well or they wouldn’t. They are in the business of making money, right?

Their risk is lower with physician mortgage loans because doctors are higher income earning professionals. They are also geographically stable meaning they will be in the home for a long period of time as their jobs are more stable thus are less likely to default on the loan.

Compared to other occupations, doctors are not as likely to lose their jobs when things change in the local economy.

Additionally, physicians tend to purchase homes in good condition in neighborhoods that are kept up well. Physicians also have the income to keep the property in good condition.

Thus, if there is a loan default, the lender ends up with a property in good condition which would be easier to resell with minimal cost to the lender.

Finally, it’s all about the business and the lender wants physicians to consume other products they offer as well. This would include checking and savings accounts, car loans, and more. They are wanting to establish a relationship with potential repeat customers. This is simply just ensuring good customers for future profits.

Physician Mortgage Loans: The Cons to Consider

We have discussed many pros of getting a physician mortgage loan, but there are some cons to consider as well.

If you get a mortgage loan with zero or low-down payment, then if the market were to contract, you will owe more than your home is worth. This is known as being “upside down.”

As time goes on, there would be a good chance this situation will correct but could take years. If you need to make a move during this time, you could lose money on the home leaving you again without any cash equity to put down on the next home should you desire.

Remember, earlier in the blog I mentioned interest rates are slightly higher than on conventional loans. Well as there are some pros, this is one of the cons.

Since, some of the underwriting requirements on these loans are relaxed, this increases the risk for the lender. You pay for this by slightly higher interest rates than on a conventional loan.

There are several factors involved in determination of physician mortgage loan interest rates and really requires researching each lender who underwrites these loans to compare the pros and cons.

Conclusion

It is a good idea to research all the options available and make your best decision based on the information available. There are several tools on the internet to help get you started.

Remember, not all states have lending programs for physicians. The good news though is that over the years there is more lenders with loan products available that meet the needs of physicians.

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