People may think a medical degree can help you get a home loan. But it's more complex and almost impossible for physicians. Medical graduates, especially college graduates, often have high debt-to-income ratios due to student loans, making it difficult to qualify for conventional home loans. Even doctors have problems when they have no savings.
Fortunately, there is an alternative that is specifically tailored to physicians, the physician mortgage loan. This mortgage is an excellent option for new physicians because they can secure low interest rates, avoid a significant down payment (sometimes even a 0% down payment), and spread their payments over a shorter period of time.
Let's take a look at what the doctor loan is all about.
What is a physician credit?
A physician mortgage is a special home loan made available only to physicians and other qualified medical professionals. Mortgages for physicians are based primarily on their projected future income, so they are subject to more lenient qualification requirements than traditional loans. This is an appealing idea for young physicians who are just starting out.
Salary of a resident or fellow is significantly lower than that of a caregiver. Lenders sometimes accept a job offer in lieu of other verification forms when determining eligibility for a loan. When first starting out in life, this can significantly affect your overall debt-to-income ratio when applying for a mortgage.
How does a physician mortgage work?
Medical professional loans are structured just like any other mortgage. Although each mortgage lender has its own terms, you should be able to choose between fixed-rate and adjustable-rate mortgages and an interest rate based on your credit history. Some lenders may have more lenient underwriting standards and require a smaller down payment than a conventional loan.
Who can qualify for a mortgage loan for doctors?
Below are some of the minimum standards a borrower must meet to be approved for a physician loan:
Grade. Hold a relevant medical degree such as an MD, DDS, DVM, DPM, or DMD. Professionals like nurses might also be eligible for physician mortgage loan programs.
Employment. Have an employment contract for a new physician or resident. A physician can qualify if they can prove that they are self-employed through their practice.
Credit score. You need a good credit score to qualify for a physician loan. Most programs require a score of at least 700 to be accepted, but some accept physicians with a score of 680.
Down payment. Mortgages for physicians can range from mortgages with no down payment to mortgages with a down payment of less than 20% of the total loan amount.
What are the pros and cons of a mortgage loan for doctors?
A mortgage loan for physicians has some advantages and disadvantages. You should look at these before taking the next step.
No down payments. No down payment is often required for physicians applying for a mortgage. With this loan, you avoid paying private mortgage insurance and secure a low interest rate without a down payment. Of course, a down payment will reduce your monthly payment and the interest you pay over the life of the loan if you can. In addition, a down payment immediately increases your equity.
No private mortgage insurance (PMI). For a conventional mortgage, a borrower must first deposit at least 20% of the purchase price private mortgage insurance (PMI) can be waived. PMI, or Private Mortgage Insurance, is a monthly premium added to your mortgage payment to cover the lender in case of your default. Some lenders may consider you a "risky" borrower if your down payment is low. Essentially, the PMI you pay guarantees your lender will be compensated in the event of a default on your loan.
However, with a physician mortgage loan, you can avoid private mortgage insurance even with a small down payment.
Debt-to-income ratio and student loans. Most conventional mortgages require a debt-to-income ratio of 43% or less as an eligibility requirement. It may seem impossible to stay within this percentage if you have taken on significant medical school debt. However, when calculating your DTI, medical mortgages do not include your entire student loan payment.
Limited loans. The maximum conforming loan amount of a conventional mortgage is between 647.200 and 970.800 US dollars. In 2023, the base loan limit will be 715.000 USD will increase, and the maximum limit will be around 1.073.000 USD. In contrast, there is no such borrowing limit for physician mortgages, giving physicians and their families more Financial freedom .
Close on a house before you start a job. With the option of a 100% loan guarantee, much higher credit limits are now available, but at a more expensive interest rate. You can finance your new residence ca. Close 90 days before starting your new job if you meet milder occupational requirements. You may need to set up a savings or checking account, or even both, with your lender to further solidify your financial relationship with them.
Interest. One downside to doctor's rates is that they have higher interest rates than traditional loans. Most conventional mortgage loans have an interest rate of 4.5%, but a doctor's loan starts at 4.75.
In addition, traditional interest rates have fixed interest rates, but physician loans have variable interest rates that can change over the life of the loan.
No down payments. In addition to increasing the likelihood that you'll spend more on a home than you can reasonably afford, skipping the down payment can quickly leave you owing more on your mortgage than the home is worth.
Student loans and mortgage payments. Even if they do not consider student loans, it does not mean that they are still there. You still have to pay them, and now you have to carry your mortgage payments, too. If it is not managed properly, it can cause you to accumulate a lot of debt. In this case it is better to consider debt consolidation. This way you can pay off your debts systematically and manage your payments better.
A physician loan is a great way to secure home financing for new physicians. You should keep in mind that there are advantages and disadvantages to this loan. Therefore, it is advisable to look into your financial situation. You can also talk to a financial planner to find out if you can take on the additional debt and your student loans.
The decision to own or rent a home is an important one. Therefore, it is important to consider all options before jumping in.
Loretta Kilday is a lawyer.