There are a number of differences between conventional mortgages, FHA mortgages and physician mortgages.
When lenders issue conventional mortgages, most of the time they do so with the intention of selling it to a government sponsored entity like Fannie Mae or Freddie Mac. These entities have somewhat tight restrictions on mortgage applicants that the issuer must adhere to if they want to sell the loans later.
On the other hand, banks that offer physician loans plan to keep them and not sell them, thus they can offer relaxed underwriting guidelines and waive some of the requirements of conventional loans.
Loans that are insured by the Federal Housing Administration (FHA) provide a safety net to lenders, which enables them to also loosen their lending requirements, though not to the extent of physician mortgages.
Below is a comparison of these mortgage types:
There are a number of programs available to obtain a conventional mortgage for less than 20 percent down, sometimes for as little as 3 percent. Often, you can get a conventional mortgage for 10 percent down.
However, anytime you do not make a 20 percent or more downpayment, you will be required to pay private mortgage insurance (PMI).
With FHA, you can get a mortgage for as little as 3.5 percent down, provided you have a credit score of at least 580. If your credit score is between 500 and 579, you must put 10 percent of the purchase price down on the loan.
Many lenders that offer physician mortgages will allow physicians to borrow 100 percent of the purchase price. Others offer flexible downpayment options.
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Conventional mortgages will charge private mortgage insurance anytime the borrower does not make a downpayment of at least 20 percent of the purchase price. PMI rates vary, but some banks charge as much as 5 percent of the original loan amount.
On an FHA loan, you will pay a one-time mortgage insurance premium of 1.75 percent of the loan amount at closing, which can be financed into the overall loan. Then there is a monthly premium you will as part of your mortgage payment based on the length of the loan, loan amount, and the downpayment. The annual premium amount can range from 0.45 percent to 0.85 percent of the overall loan amount.
Physician mortgages almost never require private mortgage insurance.
Lenders must assess your ability to repay your mortgage. One factor is determining how much of your monthly income will be taken up by your monthly debt payments, including your new mortgage.
Conventional and FHA mortgages also take into account existing automobile loans, your credit card balance, and student loans when determining your debt-to-income ratio.
Conventional mortgages limit your debt-to-income ratio to between 35 and 40 percent. For an FHA mortgage, you can have a ratio of 45 to even 50 percent.
One thing that sets a physician loan apart is that lenders will either recalculate the impact of student loan debt or dismiss it altogether, making it easier to qualify.
Conventional mortgages that have to conform to Fannie Mae and Freddie Mac guidelines cannot exceed a certain amount borrowed. In most areas of the country, the limit is $417,000. It can reach as high as $625,000 in markets where real estate is more expensive, such as Hawaii, New York City and San Francisco.
If you want a mortgage outside those limits, you will need to qualify for a jumbo mortgage loan. Jumbo mortgages cannot be sold to Fannie Mae or Freddie Mac. Therefore, lenders who finance these loans take on a higher level of risk because they have to keep them on their books or sell them to outside investors.
Jumbo loans carry higher interest rates than conventional mortgages and more stringent loan requirements, including:
- Higher credit scores required
- Money in reserve at closing, sometimes enough to make a year’s worth of mortgage payments
- Downpayment as much as 20 percent of purchase price
On FHA loans, the value of the loan cannot exceed a certain amount, which is based largely on geography. The maximum amount in areas where real estate values are relatively low is just over $275,000. In high-value markets, the maximum loan can be as high as $636,000.
Physician loan maximums differ based on the lender. Some companies will loan as much as $2 million. Some lenders will offer different loan limits based on the amount of downpayment. You may also qualify for a higher limit based on if you’re a practicing physician versus a resident.
Conventional mortgages require the borrower to have earned income and must provide bank statements and past tax returns.
For FHA loans, borrowers do not need a minimum or maximum income to qualify. However, they must have two established credit accounts, such as a credit card or car loan. In addition, you cannot have any delinquent federal debt or judgements or any debt associated with past FHA-insured mortgages.
Physician loans will allow doctors to close on their homes before they begin work, provided they have a contract or offer letter. Self-employed medical professionals can qualify with as little as six months of historical income, versus traditional mortgages that require two years worth of 1099s.
Conventional mortgage loans will enable you to use cash gifts for your entire downpayment if it accounts for 20 percent of the purchase price. Otherwise, the lender may require that at least 5 percent of the purchase price be your own funds, and not a gift. These gifts must be accounted for and verified in writing, signed and dated by the donor.
For FHA loans a financial gift from a family member, employer or charitable organization can account for up to 100 percent of your down payment, provided the borrower meets a minimum credit score. These gifts must be accounted for and verified in writing, signed and dated by the donor.
Many physician mortgage lenders will offer 100 percent financing, meaning you wouldn’t have to worry about having a downpayment. Some that do require downpayments often enable physician borrowers to to use gift money.
For a comprehensive guide to home financing, check out:
The Ultimate Guide to Physician Mortgage Loans in 2021
Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.