Designing your own home is one of the most exciting things you will ever do, but all of the financial details can be daunting. Thankfully, physician construction loans are available, containing some wonderful terms and conditions. In this article, we demystify the details of these specialized loans, so that you’re best informed to take charge of the decisions that are right for you and your vision.
What Is A Physician Construction Loan?
A physician construction loan is a unique mortgage product designed specifically for medical practitioners seeking to build their dream home. It combines the features of a traditional construction loan with the benefits of a physician mortgage, catering to the distinct financial needs of doctors, dentists, and other healthcare professionals.
Unlike the conventional mortgages, the loans have no requirement for an extensive employment history or a large down payment. Provided you have a valid medical license and fair credit, you qualify to get very friendly terms inclusive of avoiding private mortgage insurance, and still be able to borrow up to 100% of the cost for the project.
The flexibility of physician construction loans extends beyond the initial construction phase. Once your home is complete, the loan can seamlessly transition into a permanent mortgage, eliminating the need for a separate refinancing process and associated closing costs.
Types of Physician Construction Loans
While the core purpose of physician construction loans remains consistent, lenders offer various options to accommodate diverse preferences and financial situations. Here are the primary types of construction loan:
Construction-to-Permanent Loan
This loan type combines the construction and permanent financing into a single, streamlined package. Initially, you’ll receive a construction loan to fund the building process, covering expenses such as materials, labor, and contractor fees. Upon completion, the loan automatically converts into a fixed-rate traditional mortgage, allowing you to make regular monthly payments without the hassle of refinancing.
The primary advantage of this option is convenience, as you’ll only incur a single set of closing costs. However, you may encounter slightly higher interest rates compared to separate construction and permanent loans.
Construction-Only Loan
As the name suggests, a construction-only loan is a short-term financing solution designed solely to cover the costs of building your home. Once construction is complete, you’ll be required to pay off the loan in its entirety or refinance into a permanent mortgage.
This option is particularly attractive if you have a substantial amount of cash reserves and prefer to separate the construction and permanent financing phases. However, it’s essential to consider the additional closing costs associated with refinancing.
Owner-Builder Loan
For those with construction expertise or a penchant for hands-on involvement, an owner-builder loan may be an appealing choice. With this loan type, you assume the role of the general contractor, overseeing every aspect of the building process, from coordinating subcontractors to procuring materials.
While this option offers greater control and potential cost savings, it also demands a significant time commitment and construction management skills. Unless you have prior experience in this realm, it’s advisable to proceed with caution.
Renovation Loan
If your plans involve purchasing an existing property and undertaking extensive renovations, a renovation loan could be the perfect fit. This loan type combines the purchase price with the estimated cost of renovations, allowing you to finance both aspects simultaneously.
Renovation loans are particularly advantageous when the potential value of the renovated property exceeds the initial purchase price, enabling you to leverage the increased equity for a more favorable loan-to-value ratio.
Which Lenders Offer Physician Construction Loans?
While physician construction loans are not as widely available as traditional mortgages, several reputable lenders specialize in this niche product. Here are a few notable options to consider:
BMO
When it comes to new home construction financing, there are two types of financing: Traditional or Turnkey. Traditional requires draws from the loan to be made to the builders for materials and labor prior to the start of construction. A traditional construction loan closes before construction even starts. Turnkey construction loan financing, however, is when the loan doesn’t close until the home construction is finished. BMO Harris offers turnkey construction financing to physicians. Learn more here: BMO Physician Mortgage Review
Citizens Bank
Citizens Bank’s physician construction home loan, dubbed the “one-time close,” allows borrowers to combine the construction, lot purchase, and permanent loan into a single mortgage. This approach eliminates the need for multiple closings, simplifying the overall process and reducing associated costs. Learn more here: Citizens Physician Mortgage Review
First National Bank
First National Bank’s construction-to-permanent loan is designed exclusively for medical professionals holding degrees such as MD, DO, DVM, DMD, or PharmD. This loan type easily transitions from the construction phase to a permanent mortgage, ensuring a hassle-free experience. Click here to learn more: First National Bank Physician Mortgage
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Physician Mortgage Loan vs. Construction Loan
When considering your financing options, it’s crucial to understand the distinctions between a traditional physician mortgage loan and a construction loan. Here’s a breakdown of the key features:
Physician Mortgage Loan Features:
- No private mortgage insurance (PMI) required
- Flexible debt-to-income (DTI) ratios
- Optional down payment
- Physician loan maximums differ based on the lender. Some companies will loan as much as $2 million while others 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.
- Physician loans will allow doctors to close on their homes before they begin work, as long as they have a contract or offer letter. Even self-employed medical professionals can qualify. They’ll just need to have at least six months of historical income. (That’s still less than a traditional mortgage that requires two years’ worth of 1099s).
- You typically won’t have to worry about having a downpayment. Some lenders that do require down payments often allow physician borrowers to use gift money.
Construction Loan Features
- Potential exclusion of PMI, depending on the lender
- Flexible DTI ratios
- Higher interest rates. Construction projects are riskier for a bank to take on. Ultimately, your rate will depend on your credit score.
- Downpayment required. With Construction-only loans, for example, you’ll want to be able to pay off the loan in full after construction, or you’ll have to refinance into a traditional mortgage which comes with a whole other set of closing costs.
- You’ll work with contractors (or take on that role yourself) to build your home.
While physician mortgage loans offer greater flexibility and potentially lower costs, construction loans provide the unique opportunity to build your dream home from the ground up, tailored to your specific preferences and lifestyle needs.
Key Takeaways
Of course, the major differentiator between these two loans would be the amount of work you’re willing to put in yourself. In other words, if you want a house that is already built and doesn’t come with the need for major renovations, take the traditional route. If you are ready to have longer time frames and want to be in full control of what your home and land look like, then a construction loan would be the way to go.
Both of these loans, in the end, feature favorable terms and exclude PMI. Plus, both offer potentially millions in financing. That being said, you are more likely to pay more over the life of the loan for a construction loan, since you may find yourself stuck with a higher variable rate and also have to provide a down payment. To get matched up with lenders that can provide a physician construction loan for your next home, request your rates with LeverageRx.
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