In the past, medical professionals who wanted a high-priced, luxury home had to obtain a jumbo mortgage to finance the purchase. Traditional jumbo mortgages often had more restrictive qualifying standards and charged higher interest rates than standard mortgages.
Now, because of the emergence of physician mortgages, medical professionals have another option beside the traditional jumbo mortgage.
A jumbo mortgage loan is a mortgage that exceed the loan amount limit for conforming loans. A conforming loan is one that meets the purchasing guidelines of Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) that make credit more available to targeted borrowers.
One way they do is buying conforming mortgages from lenders so that financial institutions have more cash on hand to fund more mortgages.
To conform to the GSE guidelines, borrowers typically must meet lending requirements for downpayment amount, credit score and cash in reserve.
The properties financed through Fannie and Freddie must also meet certain requirements, most notably being that the loan on the property cannot exceed a certain amount.
In 2017, the conforming loan limit in most of the continental U.S. is $424,100. About 115 of the more than 3,100 counties in the U.S. have a conforming limit between $424,100 and $636,150 due to the higher overall value of homes in those markets. This higher limit applies to places like Fairfield County, Connecticut and Suffolk County, Massachusetts, where Boston is located.
In another 108 counties, such as those of New York City, Los Angeles, and San Francisco, the conforming limit is $636,150. The five counties in Hawaii also have higher conforming limits.
Mortgage loans above these thresholds are considered jumbo mortgages.
Jumbo mortgages cannot be sold to Fannie Mae or Freddie Mac. Therefore, lenders that 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.
There is also greater risk in financing luxury homes, as they can be difficult to re-sell in some markets and are susceptible to swings in value. Because of this, lenders will often obtain two separate appraisals before signing off on a jumbo loan.
Because of the extra risk, jumbo loans have historically carried more stringent loan requirements than those of standard mortgages, including:
- Higher credit score
- 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
Jumbo loan borrowers also usually pay a slightly higher interest rate than those available on standard mortgages.
The good news for doctors and dentists is that most do not have to be concerned with conforming loans and the requirements of jumbo mortgages. That’s because they can qualify for a physician mortgage loan, or doctor loan.
This type of mortgage is designed to meet the unique financial situations of medical professionals, who may be trying to buy an expensive home after spending years in medical school and residency. Therefore, most don’t have the credit scores, downpayment amounts, or debt-to-income ratio that lenders would traditionally require for a high-priced home, even though they probably have more than enough income to make the monthly mortgage payments.
Banks offering physician mortgages take the approach that a doctor’s income potential will more than offset the risk of having student loan debt and little in savings. Lenders making this type of loan plan to keep them and not sell them, thus they can offer relaxed underwriting guidelines and waive some of the requirements of conventional loans.
Most physician mortgages require little to no money down, recalculate the impact of student loan debt, and do not tack on private mortgage insurance (PMI).
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If you can’t qualify for a physician mortgage or don’t have the option available in your area, you may be able to take advantage of recent changes in the marketplace that have made jumbo loans more accessible.
Rates for these mortgages have reached historic lows in recent years. In addition, borrowers may find jumbo financing options that require as little as 10 percent down. Adjustable-rate mortgages (ARMs), such as the 5/5 ARM in which the interest rate is lower than a traditional 30-year fixed for the first five years, have recently become available.
Many lenders have also relaxed the minimum credit scores needed to get a jumbo mortgage.
Also keep in mind that the interest on mortgage loans up to $1 million can be fully tax deductible. Even if you borrow more than $1 million, you can still get a tax deduction on the interest paid on the first $1 million in borrowed funds. For example, if a $2 million jumbo mortgage requires $60,000 in annual interest payments, the borrower could deduct half of that amount, or $30,000.
Still have home financing questions? Read:
The 2021 Ultimate Guide to Physician Mortgage Loans
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.