The Ultimate Guide to Doctor Loans and Mortgages for Physicians and Dentists

We believe all doctors and physicians should have a comfortable home to retreat to after long days of treating patients. But qualifying for a mortgage may present challenges to some in the profession, especially to those just getting out of medical school or with high student loan balances. Lenders in the traditional mortgage market look at more than just income potential, and some of the characteristics of the profession may hinder a doctor's ability to obtain financing. But there are many options, and even doctors who are just starting out should be able to buy the perfect home.

The trouble with conventional mortgages for physicians

The most common home loans available are conventional fixed-rate mortgages. The main advantage of conventional mortgages is that they typically offer the lowest interest rates, especially if you opt for a 15-year term. Also, the rate is fixed for the life of the loan. But conventional mortgages don't always work well for physicians. 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, including:
  • Past income. Conventional mortgages require the borrower to have earned income, which can be a challenge for physicians just starting out after graduating medical school.
  • Limited debt.Having too much debt increases the risk of defaulting on the mortgage. Traditional loans limit the total amount of debt borrowers can have in order to be approved. This is determined by analyzing the minimum amount of your monthly income goes toward debt, and the percentage of your total income that would pay debt once you assume a mortgage payment. Traditional mortgages limit your debt-to-income ratio to between 35 and 40 percent, which might make some physicians ineligible due to the heavy amount of student loan debt.
  • Enough cash on hand for a substantial downpayment.Conventional mortgages generally require a downpayment of 20 percent of the purchase price. Anything less than that will require the addition of Private Mortgage Insurance (PMI). This is an added cost applied to conventional loans when the borrower makes a downpayment less than 20 percent of the home's purchase price. It is designed to protect the lender from the risk of default and is added to the borrower's monthly payment.
  • Limits on how much you can borrow.To conform to Fannie Mae and Freddie Mac guidelines, mortgages 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.

A special mortgage just for physicians and dentists

One way to avoid the restrictions of conventional mortgages is to apply for a special mortgage exclusively for physicians and dentists, known as a doctor loan. 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. Banks 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, including:
  • No PMI: One of the key differences between a physician mortgage and a conventional one is that the former almost never requires PMI. PMI rates vary, but some banks charge as much as 5 percent of the original loan amount. If you had to pay PMI on a high-end home, it would likely add $200 to $300 per month to your mortgage payment.
  • Income history: 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.
  • Debt-to-income: Physician loans either recalculate the impact of student loan debt or dismiss it altogether, making it easier to qualify.
  • Down payment: Even the most accommodating mortgages in the conventional marketplace require a 3 percent down payment. That's the equivalent of $15,000 for a $500,000 home. While not all lenders will provide 100 percent financing, some will, especially for lower mortgage amounts.
Typically, you can qualify for a physician mortgage if your are a medical resident or a licensed medical doctor. You can also qualify if your are a doctor of optometry, osteopathy, ophthalmology, podiatry, dental medicine or dental science.

Comparing doctor loan providers

Many regional and national banks have departments dedicated to serving medical professionals and doctor loans. One place to compare the offerings of several potential lenders is through LeverageRX, the largest financial services marketplace for physicians, dentists and medical professionals. The company's website has a section dedicated to comparing doctor loan programs of several lenders. When comparing your options, consider:
  • The interest rate available for the loan
  • How much you will be allowed to borrow
  • Downpayment requirements
  • Minimum credit score required
Some lenders establish different loan limits based on whether the applicant is a resident or a practicing physician. Others vary the amount required for a downpayment based on how much you intend to borrow.

Potential downsides of physician mortgages

Doctors should consider their individual situations before signing up for this special kind of mortgage. They are, after all, designed for people who have already accumulated a large amount of debt, and physicians should consider how much more they can handle. It can be risky to buy a large home with little to no money down. For starters, when fees and closing costs are added, a home purchased with no money down will create a situation where the homeowner starts with negative equity. The problem would be exacerbated if the housing market declines after you buy the home, much like it did during the 2008 housing crisis. Also keep in mind that it will be difficult to build equity in the early years because most of a homeowner's monthly payment in the early years of the loan is paying interest. In fact, after five years, you may have only paid down 1 to 2 percent of your original principal. If there's a chance you may have to move in, say, five or 10 years, or if your financial situation would improve during that timeframe, you may want to consider renting. While you won't have the potential of seeing your investment in real estate growth in value, you also don't have property taxes, insurance, maintenance, or the potential of owning a home that loses value. If instead you saved your money during this period, you could then take out a conventional mortgage with a larger downpayment. Waiving some of the underwriting requirements of conventional mortgages adds risk for the lender. Mortgage companies will mitigate some of that risk by charging a higher interest rate than what one can receive on conventional loans. They will also require higher credit scores than what they may approve of with a conventional loan. Lenders may also require that the borrower open an account with the bank as a stipulation of obtaining the mortgage financing so they can benefit financially from that business.

The process of obtaining a doctor mortgage

The mortgage application, approval and closing process could take one to two months. One of the ways of expediting the process is to obtain pre-approval. This involves getting approved for the mortgage before you settle on a house to buy. In fact, potential homeowners often obtain pre-approval before they shop for a home in order to know their price range. The pre-approval process will determine how much you can borrow based on your credit, income, and how much you can put down. It's not a guarantee you will be granted a mortgage loan by the lender, but it makes it far more likely. A loan cannot be fully approved until you make an actual offer on a home.

Documents you need for approval

Another way to speed the loan approval process is to gather the necessary documentation. This will vary by lender, but typically you should be prepared to provide records that show:
  • Proof of identification. At the very least you will need a government issued ID with your full name, birthdate and current address. You may also need a birth certificate and you will also need to provide your Social Security number.
  • Proof of residency. If you have been matched to a residency program you should be prepared to show the lender your employment contract.
  • Income and employment. If available, gather tax returns and W2s from the previous two years. If you're in practice, you should also have two month's worth of pay stubs.
  • Current debt. Gather documents related to student loans, car payments, and credit card debt, including loan papers and monthly statements.
  • Self-employment. If you are self-employed, be prepared to provide the lender tax returns for the business from the last two years, K1 statements showing income and percentage of ownership for the previous two years, and the most current profit-and-loss statement and balance sheet.
  • Current assets. Lenders will want to review statements of your checking, savings, and brokerage accounts, typically from the previous three months. Also include information, such as the address and the lender, of any real estate you currently own.
  • Source of downpayment. If you will be making a downpayment, you will need to verify the source of those funds, whether from a retirement account, savings account, or other source.
  • Information on the property to be purchased. Be ready to provide the lender pertinent information on the home you plan to buy, including the price, address, year built, type of property, etc.

Questions to ask the lender

In addition to the downpayment required and the interest rate charged, there are other questions you should pose to potential loan officers before applying for a doctor mortgage, including:
  • What are the fees and closing costs? All mortgages have fees and costs due at the time you close on the loan. These include fees for loan origination, appraisals, attorneys, inspections, and other costs. The costs will vary among lenders. When evaluating and comparing lenders, obtain a fee sheet and confirm that the quoted closing costs represent all fees you will be charged.
  • Is there a penalty if I pay the entire loan balance before the end of the term? Some lenders may assess a penalty if you pay the loan early, refinance it, or sell the home before a certain date. In some cases, lenders need to maintain a mortgage for a certain timeframe to recoup its costs and generate an adequate profit. Ask before signing if there is a pre-payment penalty and how much the penalty will cost.

Other alternatives to doctor loan mortgages

In addition to doctor loans, there are several alternatives to conventional mortgages that you may want to investigate, including:
  • Adjustable rate mortgages. Also known as an ARM, this type of mortgage establishes an interest rate that will adjust over time. The rate will stay fixed for the first three to 10 years, depending on the term selected. After that initial term expires, the rate will adjust regularly based on certain economic factors. The main advantage of an ARM is that the initial rate will likely be lower than what you can get on either a conventional loan or a doctor loan. However, the rate you pay will rise after that period will expire. Using an ARM may be a good way for a new doctor to pay less for a mortgage, then have the cost rise as the doctor's income also increases.
  • FHA loans. Loans that are insured by the Federal Housing Administration (FHA) provide a safety net to lenders, which enables them to loosen their lending requirements. FHA loans typically only require a 3.5 percent downpayment and they accommodate borrowers with lower credit scores than those of conventional mortgages. The downside is that loan amounts are capped much lower than what you can borrow from a physician mortgage and other types of loans.
  • VA loans. If you are a veteran, current member of the military or a surviving spouse of a veteran killed in the line of duty, you may want to consider a VA loan, which you can obtain with no money down.
  • Conventional 97 program. The main advantage of this program is that, unlike conventional mortgages, the borrower can use a one-time gift as the source of funds for a downpayment, and that amount can be as little as 3 percent of the purchase price.  It is limited to first-time homebuyers or those who have not owned a house in the previous three years.
  • 80/10/10 mortgages. Also known as a piggyback loan, this is another type of mortgage that can help buyers avoid paying PMI if they can't make a 20 percent downpayment. This is accomplished by splitting the mortgage into two loans and making a 10 percent downpayment. Typically, the first loan is a traditional 30-year fixed mortgage that covers 80 percent of the purchase price. The second loan covers 10 percent of the purchase price, typically through a home equity line of credit. This type of mortgage has been more difficult to obtain since the recent housing crisis, but they are becoming more accessible.