- Getting started
- The trouble with traditional mortgages
- What is a physician mortgage loan?
- Who is eligible for a physician mortgage loan?
- Why do lenders offer physician mortgage loans?
- Pros and cons of physician mortgage loans
- Other types of mortgages for doctors
- Zero-down vs. downpayment
- Fixed-rate vs. adjustable-rate mortgages
- Buy vs. rent in residency
- How to get a physician mortgage loan
- Companies that offer physician mortgage loans
- How lenders view self-employed borrowers
- Understanding the home buying process
- Common mistakes doctors make when buying a home
- Physician mortgage loan terminology
The Ultimate Guide to Physician Mortgage Loans in 2018
Whether you are hunting for your first home or your dream home, many find the homebuying experience to be exciting.
But finding the right mortgage loan you need to finance it? Not so much. And for doctors, it's even more challenging given their unique financial background.
That's where we come in.
Between our expertise and your due diligence, together we can make your mortgage lending experience as smooth as possible. In this guide, we are going to cover everything you need to know about physician mortgage loans (including the surefire way to get the best deal available.
Let's dive in.
You just finished medical school or residency. You’ve borrowed more for school than what you’ve earned so far. You’re not making much money — yet.
Although you are starting a career that all but promises job security and a high salary, you may denied when trying to buy your first home.
Why? Because strict rules govern the mortgage industry.
Before the economic decline, lenders relaxed their standards. This led to subprime mortgages. It also resulted in many homebuyers getting loans they couldn’t afford.
The resulting financial crisis crippled the economy for years. That caused the mortgage industry to become more strict. They had to enforce the old rules. They again started requiring minimum downpayments, a steady income, and debt under a specific threshold.
Why new physicians often can’t qualify for traditional mortgages
Unfortunately, new physicians don’t often meet these standards. They often fall short because:
They have no past income
Lenders of traditional mortgages do not look at income potential. They require income history.
That can be challenging for new physicians who just emerged from years in medical school. Your residency paid you very little. You’re starting your career later than most.
Conventional mortgage lenders typically insist on two years worth of income. This income must demonstrate you can pay the mortgage bill you’re about to borrow.
A doctor-in-training or new physician cannot meet this requirement. Therefore, they likely cannot obtain a conventional mortgage. They would have to wait until they’ve established themselves in their practice.
They have limited savings
The combination of going to school and having no job means you likely have no money saved. This means you have nothing to use for a downpayment on a new home.
Conventional lenders require something for a downpayment. They want you to invest some of your own money in the property they are financing. The more you put up, the less likely you are to default on a loan. If you do, you lose the money you put down.
The industry relaxed its downpayment requirement years ago. Some even allowed 100 percent financing. But following the 2008 financial crisis, lenders were forced to impose downpayment requirements again. The most accommodating mortgages require 3.5 percent of the purchase price.
They can’t use cash gifts for a downpayment
Using a cash gift isn’t always an option. This is especially true for conventional mortgages. Lenders scrutinize non-payroll deposits, such as gifts, in your bank accounts. Regulators require that lenders know the source for all funds used to buy a home to prevent fraud.
You may be able to use a legitimate gift from parents or other family member. But you will need to show the lender that it’s an actual gift from the family member. The gift giver may need to provide bank statements to prove they were the source of the gift.
Lenders will also typically require a “gift letter” from the giver. This document informs the lender of the who the donor is, the relationship between donor and borrower, and the amount given.
Just as important, the donor must confirm they don’t expect repayment. Plus, the gift giver can’t have any interest in the sale of the property.
Lenders are also concerned about downpayments that come from taking on debt. Examples include credit card advances, payday loans, or a loan from a retirement account. Any of these would impact the borrower’s ability to repay the mortgage.
They have too much debt
Traditional loans limit the total amount of debt you can have at application.
This is determined by analyzing:
- The percentage of your total income that would pay your housing costs once you assume a mortgage payment.This includes your mortgage payment, taxes, insurance, and homeowners association dues.
- The amount of your monthly income that pays debt and obligations. This is known as your debt-to-income (DTI) ratio.
Mortgage lenders will tally your credit card payments, car loans, student loans, child support, alimony, store credit payments, and personal loans. When determining your monthly obligations, lenders use your minimum monthly payment for each debt.
Lenders compare your debt with your current income. Traditional mortgages limit your DTI to between 35 and 40 percent. That means if you earn $10,000 a month, your current debt can’t exceed $3,500 to $4,000 a month.
The problem for new physicians is they have little income, but a lot of debt. The biggest culprit is student loan debt.
According to the Association of American Medical Colleges, more than three-quarters of 2016 medical school graduates incurred student loan debt.
Those graduates owed, on average, almost $190,000.
If you’re a new physician, your DTI will surely fall over time. But for traditional mortgages, it means waiting to buy a house until that happens.
They want to buy a house that doesn’t qualify for a traditional mortgage
Another challenge for new doctors is the house they may want to buy.
Once you know you can count on a certain level of income, you can buy a more expensive house. Unfortunately, buying a house under traditional lending rules means limiting what you get. This is true even if you meet debt and income standards.
To conform to Fannie Mae and Freddie Mac guidelines, mortgages cannot exceed a certain amount borrowed.
In most places, a conventional loan does not enable you to shop for a home at the top of the market. If you want a $1 million home and can afford it, you have to find something other than a conventional mortgage.
What is a physician mortgage loan?
Fortunately, lenders found a way to provide mortgages to new doctors. They created the physician mortgage loan.
A physician loan is a special type of mortgage that is only available to doctors and other medical professionals. You can qualify for a physician mortgage if you 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.
Banks offering physician loans take the approach that a doctor’s income potential will more than offset the risk of having student loan debt and little in savings.
Who is eligible for a physician mortgage loan?
The answer depends on the lender. One thing to keep in mind is that not all lenders operate in all states. Depending on where you live, you may only have a few options.
Lenders may also limit their loans based on:
- Your area of practice. Lenders specify the medical designations that qualify for their physician loan program. For example, a lender may make its physician loan available to MDs, DOs, DDSs, DMDs, ODs, DPMs and DVMs.
- Your experience. Some lenders will not lend to residents. On the flip side, others will not offer a special physician loan if you’ve been practicing at least 10 years.
- Your credit score. A few lenders stipulate a minimum credit score to qualify for a physician loan.
How good does my credit have to be?
It depends on the lender. Some lenders require a minimum score of 700 or even 720. No matter what the minimum, the higher your score, the better your loan terms.
Why do lenders offer physician mortgage loans?
When it comes to conventional mortgages, lenders don’t keep the ones they issue. They sell them to an entity like Fannie Mae or Freddie Mac. Those agencies have guidelines for the loans they will buy. That’s why conventional mortgages have strict rules on debt, income and downpayments.
Selling mortgages gives lenders capital faster than receiving monthly payments. They use the cash influx to make more loans.
But with physicians loans, the lender keeps the mortgage. They don’t sell it. Therefore, they don’t have to follow the Freddie and Fannie guidelines.
There are a number of reasons it makes sense for lenders to do this for new physicians:
- Physicians are low-risk borrowers. Doctors all but assured of making a high income.While it’s possible for physicians to lose their jobs, it’s far less likely to occur than for average office worker or factory employee. Doctors typically have long-term job security. This means less risk of mortgage default.
- Physicians buy low-risk properties. Most first-time homebuyers buy starter homes at the low end of the market. They are typically older, smaller and may have issues. They may be located in undesirable neighborhoods. Many homeowners starting out also lack the resources to properly maintain the home’s condition. All This makes them harder to resell. If the lender has to foreclose, 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. They can more easily resell it and recoup their costs of making the loan.
- Lenders want physicians’ long-term business. Banks that provide you a mortgage want you to open checking and savings accounts with them. They will expect you to take out loans for your next car and other purposes. And they will also attempt to sell you investment products and business loans.
Pros and cons of physician mortgage loans
The main upside of a physician loan is avoiding the restrictions of conventional mortgages. They offer financing with:
No private mortgage insurance (PMI)
Conventional mortgages require private mortgage insurance (PMI) if your downpayment is less than 20 percent of the purchase price.
The premium for PMI is added to your mortgage payment. You are paying the insurance. The cost may range from under 1 percent to 1.5 percent of the loan. Some banks charge as much as 5 percent. Paying PMI on a high-end home could add $200 to $300 per month to your mortgage payment.
Physician mortgages almost never require PMI. To lenders, physicians, even new ones, pose little to no risk of default. So there is no reason to make them pay PMI.
Little to no downpayment required
Some physician loan providers offer 100 percent financing. A few lenders may even offer full financing to residents or fellows.
Whether you can obtain 100 financing depends on the size of the lender, the size of the loan, and the whether you’re a resident or practicing physician.
Even if your loan is in the millions of dollars, flexible downpayment options are available.
Little to no income history
Physician loans often allow doctors to close on their homes before they begin work. They will be required, however, to 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.
The ability to exceed normal DTI ratios
Physician loans either recalculate the impact of student loan debt or dismiss it altogether. This lowers your debt-to-income ratio. A lower DTI makes it easier to qualify for financing.
The ability to exceed conventional loans limits
Physician loans are often considered jumbo mortgages. This means they allow higher loan balances than conventional and FHA mortgage loans. A physician mortgage lender may enable you to buy homes for $1 million, $2 million, or more.
The downsides of physician mortgages
Rules for conventional mortgages don’t just protect lenders. They can also protect borrowers.
By forgoing those protections, you the borrower take on more risk. Those include:
Starting out with no equity. It can be risky to buy a large home with little to no money down. If your home declines in value, your mortgage balance could exceed your home’s value. This is known as being upside-down on your mortgage.
The other problem with having little equity is if you have to sell. If you get a career opportunity in a new city, you have to sell your home. You will need to sell your home for about 10 percent over your mortgage balance to cover real estate agent fees and other costs. And that’s if you want to break even. If you want money for a downpayment on your next home, you need to sell your current home for even more.
The challenge is that most of a homeowner’s monthly payment in the early years is interest. In fact, after five years, you may have only paid down 1 to 2 percent of your original principal.
Potentially buying too much house. Mortgage borrowers tend to let lenders set their boundaries. Having a lender’s OK to buy a $600,000 home with no money down doesn’t mean it’s the best use situation for you. Some physicians may do better to put money down and buy a less expensive home.
Paying a higher interest rate. Waiving underwriting requirements of conventional mortgages adds risk for the lender. Mortgage companies mitigate higher risk by charging higher interest rates. You can count on paying a higher mortgage rate on a physician loan, therefore, than a conventional loan.
Should I get a 15-year or 30-year mortgage?
It’s more affordable to pay a 30-year fixed-rate mortgage. You will save in the short-term. Therefore you can either buy more house or have a lower payment.
A 15-year fixed mortgage will likely save you money in the long-term because:
• You’ll pay a lower interest rate and less overall in interest payments
• You’ll build equity faster and have more profit once you sell your home
• You likely won’t keep a home for 30 years anyway, especially if it’s your first home
What determines the mortgage interest rate I pay?
The biggest influence on mortgage rates are factors beyond your — or even your lender’s — control.
Lenders typically sell mortgages to investors who want a regular stream of income. Individual investors don’t purchase a whole mortgage, however. They buy pools of similar mortgages called mortgage-backed securities (MBS). An MBS is similar to how a mutual fund is a pool of different stocks.
Like with other types of investments, the price of MBS rise and fall continuously based on demand. When MBS prices drop, lenders raise interest rates. When prices increase, mortgage rates will fall.
Your individual financial situation also determines your rate. The better your finances, the lower your rate. Underwriters will assess your risk based on your income, debt, credit score and how much you have in savings.
How does a mortgage affect my taxes?
The impact was much greater prior to December 2017. That’s when Congress passed and President Trump signed the Tax Cuts and Jobs Act.
The new tax law increased the standard deduction. Beginning in 2018, single filers will be able to deduct $12,000 from their taxable income, while married filers can deduct $24,000. In 2017, those deductions were $6,500 and $13,000.
By making the standard deduction so high, it’s estimated that less than 10 percent of taxpayers will have enough deductions (e.g. mortgage interest, student loan interest, property taxes, gifts to charity, etc.) to itemize. Prior to the tax act, about 30 percent of tax filers itemized.
It addition the law reduces the limit on deductible mortgage debt from $1 million to $750,000. This also applies to second homes.
Other types of mortgages available to doctors
The mortgage industry offers several types of loans depending on a borrower’s needs. In addition to physician mortgages, options include:
Though they don’t work for all physicians, conventional mortgages might be an option if:
- You have several years worth of income history.
- You can afford at least 5 percent for a downpayment.
- Your debt-to-income ratio, including student loans, is under 40 percent.
FHA mortgage loans
These are mortgages that are insured by the Federal Housing Administration (FHA). With that insurance, lenders can take on additional risk and relax their underwriting. This includes:
• Requiring a downpayment of only 3.5 percent of the purchase price
• Accommodating borrowers with lower credit scores
• Allowing borrowers to use a financial gift from a family member, employer or charitable organization for up to 100 percent of the downpayment. This applies only if the borrower meets a minimum credit score.
The main downside is that loan amounts are capped. The current cap was increased in 2018. This makes it a potential option for more physicians looking for high-value homes. However, the FHA cap remains much lower than what you can borrow from a physician mortgage and other types of loans.
Here is an overview of current FHA loan caps:
• In about 82 percent of the country, the maximum loan is $294,515.
• Other markets have higher caps. This is because the average home value in those areas is much higher.
• The FHA loan ceiling in designated high-cost areas of the country is $636,150. For 2018, there are 75 counties at the loan limit ceiling.
High-cost areas include counties that comprise the following metropolitan areas:
• San Francisco-Oakland-Hayward, CA
• Los Angeles-Long Beach-Anaheim, CA
• Napa, CA
• San Jose-Sunnyvale-Santa Clara, CA
• Santa Cruz-Watsonville, CA
• Edward, CO
• Glenwood Springs, CO
• Breckenridge, CO
• Washington, D.C.
• Honolulu and Kapaa, HI
• Jackson Wyoming-Idaho
• Vineyard Haven, MA
• New York City
• Elizabeth City, NC
• Summit Park, UT
There is also an ongoing premium that is part of your monthly payment. The amount is 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.
VA mortgage 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. These are loans provided by private lenders but guaranteed by the U.S. Department of Veterans Affairs. This enables the lender to provide more favorable terms.
To be eligible, you must have satisfactory credit, sufficient income, and a valid Certificate of Eligibility (COE). The property must also meet minimum requirements.
Benefits of VA mortgages include:
• No downpayment required unless the lender requires one
• No PMI
• A cap on closing costs
Also known as a piggyback loan, this is another type of mortgage that can help you avoid paying PMI. 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.
Should you put zero down or make a downpayment?
Physician mortgages often waive downpayment requirements.
If you have the money for a downpayment, should you do it? Or are you better off saving your money and taking advantage of 100 percent physician loan financing?
The case for making a downpayment
Mortgage underwriters assess your risk. They look at the probability of you defaulting. This is true even with physician loans. Posing less risk comes with two advantages:
• You’re more likely to get approved.
• Lenders will lower your interest rate.
The more of your own money you invest in your home, the less risk you pose to the lender. That means a lower interest rate. While it will cost you now, the lower rate can save you money over the long term. Also, the less you pay in interest, the more you’re paying down principal. This means you’re building equity faster.
The downside of making a downpayment
The downside of a large downpayment is having less cash on hand. Say you paid $20,000 down on a home. That’s $20,000 less you have in your savings account. That means:
It’s not available for emergencies. What if something happens to you? What happens if you have to replace something expensive on your house? Without cash on hand, you’ll either have to use a credit card or take out a personal loan. That means even more debt.
You can’t invest it. Say you invested half of the aforementioned downpayment, or $10,000. If you earned a 5 percent annual return, that money will grow to more than $16,000 in 10 years.
And don’t forget about retirement. You will need to save a considerable amount to continue your lifestyle in retirement. Plus, your career is starting later than most. Therefore, you need to save as much — and as soon — as possible.
You won’t have access to your money. Whatever you put down is tied up in your home until you sell it. The only other option is to take out a home equity loan. It’s important to have cash that is readily accessible when needs arise.
Also keep in mind that you’ll need a significant amount of cash to get into your new home. Thinks to consider include:
• Closing costs
• Moving expenses
• New paint and carpet
• New appliances
• New furniture
A look at the numbers
Imagine three physicians in the market for a $600,000 home:
• One who has no money to put down.
• One who has saved enough for a 3.5 percent downpayment, equal to $21,000.
• One who can put down 10 percent, or $60,000.
The first physician gets a 30-year fixed mortgage at 5 percent, which results in a monthly principal and interest payment of $3,220.
The second physician also gets a 30-year fixed. But the downpayment provides a slightly lower interest rate of 4.75 percent. This results in a monthly principal and interest payment of $3,020.
The third physician can get a 30-year fixed with a rate of 4.50 percent, which gives them a monthly payment of $2,770. This physician could also opt for a 15-year fixed at, say, 4.25 percent, and have a monthly payment of just over $4,000.
One way to look at whether a downpayment is the right choice is to consider the break even point.
The second physician spent $21,000 to get a lower monthly payment. The monthly savings is $200. It would take 105 months, or just under nine years, before the monthly savings adds up to $21,000.
The third physician saved $450 a month by making a $60,000 downpayment. It would take more than 11 years before those savings equal to the original downpayment amount.
Build equity faster
The difference in monthly payments may not seem to warrant making a downpayment. But it may make a difference in how quickly you build equity in the home. This is especially important if you might sell in a few years.
Consider the above examples in a scenario where the physicians have a career opportunity that requires a move. The move occurs eight years after purchasing their $600,000 home.
After eight years, the first physician has a loan balance of just around $514,000. This means equity of $86,000 plus whatever amount the property has increased in value.
The second physician has a loan balance of $493,000, which means equity of $107,000 plus whatever amount the home has increased in value.
The third physician has a loan balance of just over $457,000, which means equity of $143,000 plus appreciated property value.
If the third physician chose the 15-year fixed mortgage, the loan balance would be $292,000 after eight years, which means equity of more than $300,000 to use toward the purchase of a new home.
A third option is buying points
A third option is to use excess cash to buy down your interest rate. This is known as paying mortgage points.
Mortgage points, also known as discount points. are fees a borrower pays to the lender at closing in exchange for a reduced interest rate. A point costs 1 percent of the amount borrowed. So if you borrowed $300,000 a point would cost $3,000.
A point might lower your interest rate by 25 basis points. That means you could buy down your rate from 4.5 percent to 4.25 percent by buying one mortgage discount point.
To determine if this is a good strategy, consider:
1. How long you plan to live in your home
2. How long it will take to “break even” on buying the discount point
Using the example above, a discount point costs $3,000 on a $300,000 home. Your interest rate fell from 4.5 percent to 4.25 percent.
Without paying points, your monthly payment would be $1,928. With the points, your monthly payments falls to $1,884. That’s a difference of $44 a month. It would take 68 months, or nearly seven years, before you recouped your $3,000 point purchase. That means you would have to live in the house that long to make the $3,000 worth it.
Consult with your mortgage broker or other financial professional to determine which of these three options is best for you.
Fixed-rate vs adjustable-rate mortgages
When you apply for a mortgage you may be given two options:
• A fixed-rate mortgage
• An adjustable-rate mortgage (ARM)
A fixed-rate mortgage carries the same interest rate for the life of the loan. Once you sign the loan papers, your rate is fixed until you pay if off. That’s true whether it’s for 10, 15 or 30 years. If you lock in a 5-percent rate at closing, you will pay that every year you carry the mortgage. If overall rates rise in 10 years, you’ll still pay 5 percent. The same is true if rates decline.
With an adjustable rate mortgage (ARM), the lender will adjust the interest rate after an initial fixed period. This period is typically five, seven, or 10 years. ARMs are often identified by these rate adjustment periods. For example, a 5⁄1 ARM offers a fixed interest rate for the first five years. After five years, the mortgage rate will adjust each year.
The advantage of a fixed-rate mortgage is paying the same amount each month for the life of the loan. Regardless of how the interest rate environment changes, the rate on a fixed mortgage will not increase or decrease. Plus, if rates drop considerably several years later, you can refinance.
The upside of an ARM is that the initial rate will be lower. For example, a lender that offers a 30-year fixed at 4.75 percent interest may offer a 5⁄1 ARM at 4.25 percent.
In the first several years of an ARM, you will pay less in interest than if you have a fixed-rate mortgage. Typically, the shorter the initial fixed period on an ARM, the lower the interest rate.
The main consideration of getting an ARM is that your mortgage rate will likely increase and fluctuate after the ARM period. There are caps on how high a rate can increase. For example, an ARM with a 2⁄6 cap has a maximum increase or decrease of 2 percent at each adjustment and a lifetime cap of 6 percent over the starting interest rate. Even with caps, it can be more difficult to budget for your mortgage payment.
You should consider an ARM if:
You’re buying when rates are high. If mortgage rates could fall in the next few years, an ARM may enable you to take advantage of that during the adjustment period.
You don’t plan to live in the home beyond the ARM term. If your plans for the home you’re buying are short-term, it may make sense to use an ARM for financing. If you put the house on the market in five years, it won’t matter what your new interest rate will be. Therefore, it makes sense to pay as little in interest as possible to create as much equity as possible.
Many experts advise doctors just starting in a new practice to consider an ARM. There is a strong possibility you may relocate in five to 10 years.
You can potentially pay down your principal faster. One strategy is to use an ARM to take advantage of the lower upfront interest rate to build home equity faster. Here’s how it works:
Determine the principal and interest payment you could afford on a 30-year fixed. Then instead of getting the fixed-rate mortgage, finance your home with an ARM. The lower interest rate will offer a lower monthly payment.
Pay the amount you would have been required each month on the 30-year fixed. The extra money you pay will reduce the principal balance faster than if you paid the minimum on the ARM.
Here’s an example. Say you’re looking at obtaining a zero-down physician’s mortgage for $400,000. You have the option of financing with a 30-year fixed at 5 percent, or a 5-year ARM at 4 percent.
The monthly principal and interest payment on the 30-year loan would be about $2,150. The required payment on the ARM would be $1,910.
If you made the higher payment ($2,150) on the ARM, you would be paying down an additional $240 in principal each month. At the end of the five-year adjustable rate period, your principal would be $14,400 less than if you made the minimum payment.
Or looking at it another way, after five years your mortgage balance would be:
• $367,314 on the 30-year fixed loan making a $2,150 monthly payment
• $361,314 on the ARM making a $1,910 monthly payment
• $347,389 on the ARM making a $2,150 monthly payment
In this scenario, you would have $20,000 more in equity after five years using the ARM but making the higher payment amount of the 30-year fixed.
Should you buy or rent as a doctor in training?
There are a host of arguments for and against buying a house while you’re in training.
• You don’t have much money now, but you will in a few years.
• Owning is better than throwing away money on rent. But what if your house loses value after you buy it?
• You have to live somewhere. But that somewhere may be in a different state after you’ve completed your training.
• You want to buy when mortgage rates are low.
• You want to wait if it’s a seller’s market.
The case for buying now, even if you’re in training
You have options. You may not qualify for a traditional mortgage in your current situation. But you can qualify for a physicians mortgage.
Lenders who provide physician loans will waive or reduce many of the requirements of traditional mortgages. This includes income, debt, and minimum downpayments.
You can also save money by obtaining an adjustable rate mortgage (ARM). The main advantage of an ARM is that the initial rate will likely be lower than a fixed-rate loan. This gives you time to establish your practice before paying a higher rate. It’s also a way to save on your mortgage cost if you might move in a few years.
It may be a good investment. As you build your practice, you will also want to grow your wealth. Paying rent is money spent you can never get back. Buying today and selling a house down the road can net a return on your monthly mortgage payment.
Home equity is an asset. When you sell, your home’s equity can be used as a downpayment for your next house. You can also borrow against it.
You’re also investing in your future credit rating. By taking out a loan and making your payments on time, you’ll be improving your credit. This will help your ability to borrow later in life.
Your family situation makes its viable. Homeownership is a much easier call if you have a spouse who’s already working. If you have children, buying may be a better option than renting. You’ll have the ability to make the mortgage payment, you can start building credit and you can begin raising your family in your own home.
The case for renting now and buying later
There’s a chance you may have to move before you build equity. Once you’ve completed residency, do you know where you’ll set up your practice? You may have an opportunity in a distance city, another state or even overseas.
While selling a house isn’t as expensive as buying, there are costs and fees. The rule of thumb is that you will have to sell your home for 10 percent above your remaining mortgage balance to cover real estate agent commissions and other transfer costs.
If you purchased with no downpayment, you won’t have much equity unless home values skyrocket. That’s because the first several years worth of payments on a mortgage mostly cover the interest on the loan, not the principal.
Consider this hypothetical example:
You bought a home for $300,000 before starting residency. You financed 100 percent of the cost. You also rolled your closing costs into the loan, which added $6,000 to the mortgage balance. Your monthly principal and interest payment is $1,960. This does not include taxes and homeowners insurance.
After your five-year residency, you’re ready to move. Your mortgage balance is $276,400. It will take about $300,000 to pay off the balance and selling costs. If the home doesn’t appreciate in value, you’ll only break even. If it increases 5 percent over that five years, you’ll pocket $15,000.
Your finances make homeownership a challenge. Your training income won’t buy much house. Your student loan payments will start. Even with the mortgage options available, your current finances may not support home ownership.
If you expect a large influx of cash, you may want to wait. That cash can go toward a downpayment, which will make the process easier.
You’ll avoid the other costs of owning. In addition to your mortgage, you also have property taxes, insurance and maintenance to consider. Living in a homeowners association means monthly dues. Anything that breaks — be it an appliance, the plumbing, or your air conditioner — will cost you to repair or replace. Like rent, there is no return on these costs.
You don’t have time to care for or enjoy a house. You’ll be spending most waking moments on the job. That leaves little time to mow the lawn and other ownership tasks. Plus, you won’t be able to spend much time enjoying your new home.
How to get a physician mortgage loan
Best practices for the first-time home-buying experience
You will likely check out a dozen or more properties before settling on the ideal one. How many mortgage companies will you evaluate?
Almost as important as the house you choose is the mortgage company you select. Yet half of borrowers did not shop around for a mortgage.
Given your busy schedule, it may be tempting to go with the first lender you find. You might default to your current financial institution. But consider how much you’re spending on a home. Finding the best deal can save you a bundle.
Here are a few steps to take as you seek out mortgage financing:
Know your credit score. Before you begin the process, know your credit score. The higher your score, the better the terms you can obtain. Knowing this information will make it easier to compare rates and terms of several lenders.
Seek referrals. Like most medical professionals, your practice relies heavily on referrals. When people are making an important decision such as choosing a doctor, they ask people they trust.
The same goes for mortgage lenders. A good place to start is by asking your medical colleagues who have recently purchased a home. Your real estate agent should also know the top mortgage lenders in your area. Family and friends can also be a good source.
Investigate your options. Talk to your mortgage lender or broker about different options. Even if you have substandard credit, are just starting your practice, and have a mountain of student debt, you may have several mortgage options. Look for lenders who can offer a variety of mortgage options.
Research and compare companies and rates. An Internet search of mortgage companies can help you compare lender rates. Find which lenders have the most favorable loan provisions and even read reviews of other borrowers.
Decide whether to use a mortgage broker. Rather than you taking the time to find the best deal, you can work with a mortgage broker. A mortgage broker works with several lenders and finds the best deals. They also negotiate lower rates for their clients.
Mortgage questions you need to ask
Beside the interest rate charged, there are other factors that will impact whether you can obtain financing and how much you will pay. Questions you should ask before choosing a lender include:
What are the fees and closing costs? All mortgages have fees and costs due at the time you close on the loan. These include loan origination, appraisals, attorneys, inspections, and other costs. The costs will vary among lenders. When evaluating and comparing lenders, obtain a fee sheet listing these costs. 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. Lenders often need to maintain a mortgage for a certain timeframe to recoup their costs and generate an adequate profit. Ask before signing if there is a pre-payment penalty and how much it will be.
How many physician clients have you worked with? Because of the unique mortgage needs of physicians, you should seek lenders with that experience. Avoid loan officers with no experience with physicians. They will likely not understand physician mortgages or your financial situation. They will have trouble guiding you through the transaction.
Companies that offer physician mortgage loans
BancorpSouth operates in nine states: Alabama, Arkansas, Georgia, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee, Texas. It offers a physician mortgage loan product that accepts a contract of employment 90 days prior to beginning practice. However, you will be required to present your first pay stub once it is received. It offers 100 percent financing for purchase loans. Loan amounts as high as $650,000 are available for practicing physicians and residents and fellows. Both single family homes and condos are eligible. Borrowers must have a minimum credit score of 640. No private mortgage insurance or reserves are required.
BankSNB operates in four states: Texas, Colorado, Oklahoma and Kansas. It offers a doctor loan mortgage program for up to $417,000 with no downpayment. Financing is available for as much as $3 million with flexible downpayments based on the loan amount. Fixed and adjustable rate options are available.
BBVA operates in nine states: Alabama, Arizona, California, Colorado, Florida, Nevada, New Mexico, Tennessee, and Texas. The company’s doctor mortgage program allows borrowers to obtain up to $1.5 million in financing. Eligible properties include single family, multi-family and condo units. Loans are not available to residents and fellows.
BMO Harris Bank
BMO Harris Bank operates in the states of Arizona, Florida, Illinois, Indiana, Kansas, Minnesota, Missouri, Washington, and Wisconsin. Its doctor mortgage loan requires a minimum FICO score of 700. No income history is required. Multiple terms are available and BMO does not require PMI. You can get 100 percent financing for loans up to $750,000. The company allows borrowers to obtain up to $1.5 million in financing with flexible downpayment options.
Cadence Bank’s physician loans are available in Texas, Alabama, and Mississippi. Its doctor loan program is available to those in training as well as practicing professionals. Cadence’s “Early Professional” loan program allows up to $1 million with no mortgage insurance or downpayment for eligible specialties in training and those practicing for no more than 5 years. Cadence also offers a “One-Time Close” construction loan with 10⁄1 ARM, 15 Year Fixed, and 30 year Fixed Rate loan programs up to $2 million.
Citizens Bank operates in 22 states in the Upper Midwest, Northeast and parts of the Southeast United States. It offers a doctor loan program for those practicing and in training. Borrowers can obtain up to $850,000 in financing. Citizens Bank also offers no PMI construction loans up to $2 million for physicians with low downpayment options.
Fifth Third Bank
Fifth Third Bank offers physician loans in Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, and West Virginia. Their doctor loan program covers those in residency or fellowship and practicing doctors that completed residency within the last 12 months. You can borrow up to $500,000 with no downpayment. Loans up to $1 million are available with low downpayment options available. PMI is not required.
Physicians practicing longer than 12 months (or 24 months if self employed), can borrow up to $650,000 with no downpayment or up to $1.5 million with flexible downpayment options. Fixed and adjustable rate options are available.
Flagstar Bank offers physician mortgages in all 50 states. Its program offers no downpayment financing up to $850,000. You can get up to $1.5 million with downpayments based on loan amounts. Non-occupant co-borrowers are allowed. The loan is available only on 5⁄1 and 7⁄1 adjustable rate mortgages. Flagstar has a minimum credit score requirement of 720.
Fulton Mortgage Company
Fulton Mortgage Company operates in Delaware, Washington D.C., Maryland, New Jersey, Pennsylvania, and Virginia. It offers no downpayment for loans up to $1.5 million with a credit score of 700 or higher. Borrowers can purchase up to 60 days in advance of their employment contract start date. Multiple terms are available. Eligible medical professionals must not be out of training for more than 10 years unless relocating, in which the 10 year rule does not apply.
Horizon Bank offers physician loans in Indiana, Illinois, and Michigan. You can get financing within 90 days of your contract start date. Borrowers can obtain up to $750,000 with no downpayment and up to $1.5 million with low downpayment options. There is PMI based on credit score. A payroll deposit is required with an auto-debit from a Horizon bank account.
Huntington Bank operates in eight states: Illinois, Indiana, Kentucky, Michigan, Ohio, Pennsylvania, West Virginia, and Wisconsin. It offers loans to physicians who are both practicing and in training. For those practicing, borrowers can obtain up to $2 million with low downpayment options. This amount is reduced to $750,000 for residents and fellows.
IBERIABANK Mortgage offers loans to doctors in residency and practice. They operate in 14 states, mostly in the Southeast and along the East Coast. Mortgage loans are offered in 5⁄1 ARM, 7⁄1 ARM and 30 year fixed options with no mortgage insurance needed and no reserve requirements. One-time close construction loans are also available to prospective borrowers. Loan amounts for up to $1 million are available.
KeyBank’s doctor loan program provides up to $1 million with no PMI. This program is available for single family housing and condos and is available in both fixed and adjustable rate options. The company operates in 15 states.
The physician mortgage loan program from NBT Bank is available to qualifying physicians in Maine, Massachusetts, New Hampshire, New York, Pennsylvania, and Vermont. The program offers low downpayments on loans up to $850,000. The minimum credit score is 700.
Regions offers their physician mortgage product in 15 states, primarily in the South and Midwest. Loans are available for residents, fellows and practicing physicians. There are no restrictions on the number of years in practice. Plus, borrowers can close up to 60 days prior to employment. No downpayment loans are available for up to $750,000. With a downpayment you can borrow up to $1 million.
SunTrust Mortgage operates in 15 states in the Southeast U.S. Its doctor loan program is available to residents and practicing professionals who completed training within 10 years. Residents and fellows are eligible for loan amounts up to $750,000 with no downpayment. Those within 10 years of residency completion are eligible for up to $1.5 million with downpayment.
The doctor loan program from Synovus is available to practicing physicians primarily in the southeast. Borrowers can obtain up to $750,000 with no downpayment. Loan amounts increase to $2 million with downpayment. There is no PMI.
TIAA Bank’s doctor loan mortgage program is available in all 50 states. It’s available to residents and those practicing who are within 10 years of completing residency. Mortgage loans start at $200,000 and extend up to $1.5 million on single family homes. You can also get up to $2 million on two-unit properties. This doctor loan program does not require PMI and deferred student loans are excluded from debt calculations. TIAA Bank allows closing up to 60 days prior to starting employment.
University Federal Credit Union
The doctor loan program from University Federal Credit Union to eligible professionals in both training and practice. Residents and fellows are eligible for loan amounts up to $424,000 with no downpayment. They can obtain up to $1.5 million in financing with downpayments based on the loan size.
US Bank’s doctor mortgage program is available in all states. Borrowers can obtain up to $2 million for new purchases and refinancing existing home loans. Eligible properties include single family, multi-family and condo units. Fixed and adjustable rate options are available. US Bank allows borrowers to close up to six months prior to starting employment. You are required to make a 10 percent downpayment, but uou can also use gifted funds.
Washington Trust Mortgage Company operates in five states: Connecticut, Massachusetts, New Hampshire, Rhode Island, and Vermont. Its doctor loan program allows 100 percent financing up to $750,000. There is no mortgage insurance (PMI) required. Student loans that are deferred out at least 12 months are not calculated into the borrower’s debt-to-income ratio. Borrowers can close up to 60 days prior to starting employment.
How mortgage lenders view self-employed borrowers
Lenders consider your gross income when underwriting your mortgage application. This is your income before taxes. They also limit their underwriting to documented income. That means you must prove your income through payroll stubs and tax forms.
That can be challenging if you’re self-employed. Business income can fluctuate more than salary income. This can make it difficult to prove to lenders you can afford your long-term mortgage payment.
For example, say your annual net income was $85,000 two years ago and $100,000 last year. The lender will not consider you to have income of $100,000. They will average the two years to get an average of $92,500. Then they will divide that by 12 months to get a monthly income of $7,708.
Lenders use your net business income when calculating self-employment income, not your gross revenue. This is your income after all expenses and taxes are paid. The lender will include non-cash expenses like depreciation and amortization as part of that income.
The same two-year assessment for salary income applies to self-employed business income. One exception is if you were previously employed in the same field before starting your business.
To verify self-employment income, lenders will request a variety of documents. The most important are tax returns. They may also request statements from your accountant, if applicable, as well as a copy of your business license.
If you’re an independent contractor mortgage lenders will scrutinize your 1099 income more than salary or business income.
Banks don’t consider independent contractors as being steadily employed. Many of their contracts are short-term and there is no guarantee of future work.
Another problem with 1099 income is that you offset it by deducting business expenses. These includes car expenses, home office space, supplies and equipment. Independent contractors often deduct so many expenses that their net income makes them ineligible for a mortgage.
When you apply for a physicians loan, you won’t have the same problems with self-employed or 1099 income. Medical professionals can qualify with as little as six months of historical income, versus traditional mortgages that require two years worth of 1099s.
Understanding the home buying process
The mortgage application, approval and closing process could take one to two months.
One ways to expedite the process is to obtain pre-approval. This means having a lender financially approve before you settle on a house. Home buyers often obtain pre-approval before they shop to know their price range.
The pre-approval process will determine how much you can borrow. This will be based on your credit, income, and how much you can put down. It’s not a guarantee you will be granted a mortgage loan. But it makes it far more likely.
A loan cannot be fully approved until you make an actual offer on a home. The house itself will have to be inspected and appraised before the bank issues the loan.
Documents you need for approval
Another way to speed the loan approval process is to gather the necessary documents. This will vary by lender. The records you will typically need include:
Proof of identification. You will need a government issued ID with your full name, birthdate and current address. You may also need a birth certificate. You will also have to provide your Social Security number.
Proof of residency. If you have been matched to a residency program be prepared to show the lender your employment contract.
Income and employment. If available, gather tax returns and W2s from the previous two years. Physician loans may require only six months. 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. Acceptable documents include loan papers and monthly statements.
Self-employment. If you are self-employed, be prepared to provide:
• Business tax returns for the previous two years. Physician loans may require only six months.
• K1 statements showing income and percentage of ownership for the previous two years.
• The most current profit-and-loss statement
• The most current balance sheet
Current assets. Lenders will review statements of your checking, savings, and brokerage accounts. They will typically ask for the previous three months. Also include information, such as the address and the lender, of real estate you own.
Source of downpayment. If you are making a downpayment, verify the source of those funds. Indicate whether you are using a retirement account, savings account, or other source. Whatever the source, you will need to prove the money is available.
Information on the property to be purchased. Be ready to provide the lender pertinent information on the home you plan to buy. Include the price, address, year built, type of property, etc.
The closing process
Buying a home is a complex financial transaction. Once you’ve applied for a loan on a specific house, there will be a number of steps. Multiple professionals will assess your ability to pay the mortgage and the property being purchased. Each step requires a fee to be paid.
These are the steps involved in closing a mortgage loan:
Property appraisal. Your lender will order an appraisal of the home to ensure that your are not borrowing more than the home is worth.
Home inspection. The home will need to be inspected by a certified home inspector and a pest specialist. These are costs typically paid by the buyer. Home inspectors will check to ensure the home’s electricity, plumbing, roofing, HVAC system and overall structure are up to building codes. Pest specialists will look for the presence of termites. Depending on the age and/or location of the home, there may be other tests and inspections. These include tests for radon, lead, or soil integrity.
Title search. The lender will conduct a title search. A title company will verify that the seller actually owns the property being sold. A title opinion will also be conducted by an attorney. The attorney will review the home’s title for any burdens or claims that could impact the transfer of the home.
Survey. Lenders often require a survey, which makes certain that the property’s legal description matches what is on the property and that buildings on the property meet legal codes.
Common mistakes doctors make when buying a home
Ignoring your credit score. One of the worst things that could happen is finding out that your credit makes you a higher risk.
Not getting pre-approval. You don’t want tot waste time looking for homes that your lender won’t approve you for. With a pre-approval, you know how much house you can buy.
Emptying their savings on the downpayment. Don’t deplete your savings for a downpayment. You won’t have anything left for moving, furnishings and any maintenance needs. Plus, you won’t have cash available for non-house expenses. You can use a percentage of your savings, but don’t use it all.
Failing to compare mortgage lenders and getting just one rate quote. A home is likely the most expensive item you will buy. It pays to get quotes from several lenders to find the best rate and terms.
Not considering all mortgage loan options. A conventional mortgage, though the most popular option, is only one way to go. Look into physician mortgages and FHA loans. If you qualify for a VA loan, that may be your best option.
Underestimating the cost of homeownership. There’s more to owning a home that your mortgage payment. Make sure your budget can handle the full cost of the home you select. This includes homeowners association dues, maintenance, utilities, cleaning and other expenses.
Buying a home with little resale potential. If you’re buying a first home, there’s the possibility you will move again in a few years. So you may have to sell your house quickly. You may not have the luxury of waiting a few years into your post-residency before selling to build more equity.
Therefore if you’re thinking of buying a house to live in during your residency, you may want to consider more than what you want. It may be beneficial to put yourself in the shoes of the person who you might sell the house to. What will they want in a house?
Talk to your real estate agent about the most popular features among buyers in your area. Find a home with as many as those as possible. Do people in that market want fenced yards. Are open floor plans desirable. Do buyers want a certain number of bedrooms and bathrooms?
As a popular real estate adage goes, the most important factor determining property value is location, location, location. Selecting the right location may be the most important decision you make today to generate a decent profit at resale.
Physician mortgage loan terminology
- Amortization. Amortization is the process by which a loan’s principal decreases with each payment. An amortization schedule is a table that shows how much of each payment goes toward reducing the loan’s principal and how much pays interest.
- Annual percentage rate (APR). Your mortgage rate only refers to the interest charged on the loan. The APR of your mortgage also includes closing costs, discount points and other fees. As a result, an APR tends to be higher than a loan’s stated interest rate.
- Appraisal. An appraisal is an objective assessment of a property’s value by an impartial third party. The lender on your physicians mortgage will require an appraisal before closing. This is to ensure you are not borrowing more than the home is worth.
- Appreciation. This refers to the increase in value of an asset. For example, if you buy your home for $100,000 and the next year it’s worth $110,000, then it appreciated 10 percent. The opposite of appreciation is depreciation.
- Closing. The closing is the last step before you take ownership of your home. This is also called settlement. At this point, your loan has been approved and the property has been appraised. All activities of the buying process have been completed. At closing, all parties in the transaction will sign the necessary documents. Once documents are signed, you are legally required to repay your mortgage loan.
- Closing costs. These are fees you must pay at or before closing. They are expenses the lender incurred to originate, process, underwrite and finalize your mortgage. Typically you will pay these as they are incurred or in one payment at closing. Some lenders allow you to roll them into the loan. Closing costs include appraisal fees, title fees, origination fees, and points. Closing costs vary by location but average between 2 percent and 5 percent of the purchase price. Your lender should give you an estimate of your closing costs when you apply.
- Conforming mortgage. A conforming loan is one that meets the purchasing guidelines of Fannie Mae and Freddie Mac. They often buy conforming mortgages from lenders. This enables banks to have cash to fund more mortgages. Conforming loan guidelines include downpayment amount, credit score and cash in reserve. For example, in most parts of the country, a conforming loan cannot exceed $453,100.
- Debt-to-income (DTI) ratio. The percentage of your monthly income that pays debt and obligations.
- Default. This is the failure to repay a loan. If you default on your mortgage, your lender or the owner of your loan takes possession of your property.
- Equity. This is the difference between your home’s value and what you owe on your mortgage. For example, if your home is worth $400,000 and you have $350,000 left on your mortgage, your equity is $50,000. The more your equity, the more you have in cash when you sell your home. You can also borrow equity in the form of a home equity loan or line of credit.
- Jumbo mortgage. Jumbo mortgages are loans that exceed the mortgage limit for conforming loans. Jumbo mortgages cannot be sold to Fannie Mae or Freddie Mac. Therefore, lenders who finance these loans take on a higher level of risk. They have to keep them on their books or sell them to outside investors.
- Loan-to-value (LTV) ratio. This measures how much of the house price the lender is loaning you. For example, if you buy a home for $400,000 and make a $10,000 downpayment, your loan-to-value ratio is 97.5 percent. The bank is loaning you 97.5 percent ($390,000) toward your home. Typically, the lower your LTV, the better your mortgage rate.
- Origination fee. This is fee some lenders charge to originate your application. It’s typically less than 1 percent of the purchase price.
- Points. Mortgage points, also known as discount points, are fees a borrower pays to the lender at closing in exchange for a reduced interest rate. A point costs 1 percent of the amount borrowed. If you have a $300,000 mortgage, one discount point will cost $3,000.
- Pre-qualification. This is the process of being approved for a mortgage before making an offer on a house. It speeds the process because you know how much the lender will approve your loan for. It also tells your buyer they don’t have to worry about you obtaining financing. The house will still have to go through inspection and appraisal to ensure it meets the lender’s standards.
- Prime rate. This is a short-term interest rate used by lending institutions as an index or benchmark. It is tied to the Federal Funds Target Rate set by The Federal Reserve. Many loan rates, including mortgages, car loans and credit cards, are tied to the Prime Rate. Lenders will add a margin to the Prime Rate to set their loan rates. For example, say the Prime Rate is 5 percent. The lender wants to make a margin of 3 percent. They will, therefore set their lending rate at 8 percent (5% + 3%).
- Principal. This is the amount you borrowed for your mortgage. It’s the amount you have to repay with interest before your loan is satisfied.
- Principal balance. This is the amount remaining on your mortgage. Your mortgage payments includes interest and other fees, so your balance will not decline at the same rate as your payment.
- Private mortgage insurance (PMI). This is an insurance policy that protects lenders from a borrower’s default. If you default on your loan, your lender collects on the PMI policy. The premium for PMI is added to your mortgage payment.
- Processing fee. A processing fee covers the lender’s cost of processing your mortgage application. It can range between $300 to $1,500.
- Rate lock. A mortgage rate lock freezes the rate offered on a mortgage loan for a specified period. The lender essentially guarantees your interest rate won’t change between loan approval and final closing. The lock stays in place as long as you close within the specified timeframe and there are no changes on your mortgage application. Typical rate locks are for 30 to 60 days.
- Subprime loan. This is a loan made to borrowers who would not qualify for a standard mortgage. This might be because of their credit rating or current income. Because of the added risk, subprime loans carry a higher interest rate than standard mortgages.
- Term. This is the length of time a mortgage loan is schedule to last. If you get a 30-year fixed mortgage, 30 years is the term length. You will need to repay the full mortgage balance at the end of 30 years.
- Underwriting. As it applies to mortgages, underwriting is the process of assessing a borrower’s ability to repay the loan. Underwriters review your income, debt and other financial factors to determine how much risk you pose to the lender.