During the housing boom of the 1990s and into the early part of the 2000s, banks often relaxed their traditional mortgage lending standards in order to compete in the growing market.
Down payments often became optional. Prospective homeowners could sometimes borrow more than the value of a home. Those with substandard credit willing to pay a higher rate of interest could obtain financing for their dream home. Government programs also made it possible for people who years before couldn’t buy a home to obtain financing.
Then the financial crisis of 2008 hit, which deeply affected the housing market. Faced with a wave of foreclosures and declining home values in most markets, lenders re-tightened their standards.
But a segment of the population continues to have the ability to purchase expensive homes with little to no money down, little to no income history, and a large amount of debt. That segment is, of course, doctors.
So why do certain institutions break the conventional rules of mortgage lending to accommodate physicians? What’s in it for them?
Well, a lot actually.
Here are a few reasons why physicians are an attractive market and worthy of zero down physician loans despite their lack of historical income and savings.
The most obvious reason is that, even if you’re just starting out, you’re all but assured of making a high income. Banks offering this type of financing take the approach that a doctor’s income potential will more than offset the risk of having student loan debt and little in savings. In fact, the default rates on physician loans are substantially below normal levels.
And while it’s possible for physician to lose their jobs, it’s far less likely to occur than it is for, say, your average office worker or factory employee. Doctors typically have long-term job security, which means less risk of mortgage default.
Lenders not only underwrite the borrower, but also the property they are being asked to finance. They appraise, inspect, and survey before they hand over the check. That’s because if the borrower defaults on the loan, the lender will have to foreclose, then sell the property to recoup at least some of its costs.
Most first-time homebuyers buy starter homes at the low end of the market. The homes are typically older, smaller and may have issues that make them more difficult to resell, such as location or cosmetic condition. Many homeowners starting out also lack the resources to properly maintain the home’s condition. This makes them harder to resell if the lender has to foreclose and they may only get a fraction of their value in return.
On the other hand, physicians buying their first homes will likely get a desirable house in the upper end of the market. They also have the resources to keep it well maintained. In the unlikely event the doctor defaults on the loan, the lender should have a nice property on its books that it can quickly resell and recoup most of the costs of making the loan.
When you buy something from a particular retailer, you often receive emails from them with more enticing offers. This is called cross-selling. Likewise, when you buy a new TV, piece of furniture, or a new car, the salesperson usually asks if you want an extended warranty or optional features. This is up-selling.
Banks are no different. They rely heavily on selling products and services to the same customers, and convincing them to add to their initial purchases.
Physicians who earn six-figure salaries are desirable for cross-selling and up-selling opportunities.
Banks that provide you the mortgage for your first home will also want you to open checking and savings accounts with them. They will expect you to take out loans with them for your next car and other purposes. And they will also attempt to sell you a some of their investment products.
Physicians are a fraternity of high-income professionals who typically trust the advice of their colleagues. Whether you’re chatting at a medical conference, during surgery, or over a game of golf, you may be asked about your experience with financial services.
Mortgage lenders hope that by providing you a favorable loan, you’ll tell your colleagues and advise them to use the same company for their next house.
Need home financing? Look no further than LeverageRx:
Compare the best physician mortgage loan companies in 2021!
Colin is the Founder & CEO of LeverageRx, an online lending and insurance marketplace for doctors. Colin has over 10 years of experience in financial services and is a licensed life and health insurance agent.