New physicians find themselves in a unique financial situation when they apply for their first mortgage. On the one hand, they have substantial earnings potential. On the other hand, they have little income history, a massive amount of student loan debt, and little to no savings. So how do they buy that perfect home?
If you’re reading this, you’re most likely a physician just starting practice. After long days of treating patients and several years of renting, you want to retreat to a comfortable home that you can build equity in and relax.
Finding the right home is just part of the home buying process. Qualifying for a mortgage may be harder than finding a home given your unique financial situation. On the one hand, you have substantial earnings potential. On the other hand, you have little income history, a massive amount of student loan debt, and little to no savings. So how do you buy that perfect home?
Mortgages Designed for Medical Professionals
One potential option is a physician home loan, often referred to as a doctor loan. This type of mortgage loan is specifically designed for the unique challenges facing doctors and dentists who are starting out their careers later in life than other professionals, and doing so with a massive amount of student loan debt.
Lenders who provide physician loans will waive or reduce many of the requirements of traditional mortgages, including:
Income history: Whereas traditional loans require proof of historical income (e.g. W-2s, 1099s, or pay stubs), physician loans will allow doctors to close on their homes before they begin work, provided they have a signed contract or offer letter in hand.
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: Traditional mortgages usually stipulate that a borrower’s total debt-to-income ratio, including the mortgage, not exceed a certain percentage. This can be difficult for physicians who have student loans well into six figures. 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% down payment. For a $500,000 home, you would need $15,000 for a down payment.
Doctor loans, on the other hand, will often allow qualified buyers to purchase high-valued homes with no money down.
Private mortgage insurance (PMI). PMI is often a requirement on conventional mortgages in which the down payment is less than 20% of the purchase price. This is designed to protect the lender from the risk of default and is added to the borrower’s monthly payment.
Physician loans, however, do not require PMI, even if you do not make a down payment.
Many lenders who offer this type of loan vary the benefits they offer based on:
• Whether you are a resident/fellow or a practicing physician
• How much you intend to borrow
For example, some lenders will offer a $500,000 mortgage with no down payment requirement for residents and fellows and a $1 million mortgage with a 5% down payment. That cap rises to $650,000 and $1.5 million, respectively, for practicing physicians.
Downside of Physician Mortgages
Making it easier to borrow large sums of money can become a detriment under certain circumstances, and potential borrowers should consider their individual situations before jumping in.
For example, if you take out a 100% mortgage today on a $500,000 luxury home and have to relocate in, say, five years, you may have difficulty selling the property.
That’s because you will have only paid down $5,000 of the mortgage balance in that time and still owe $495,000. You will have to sell the home for substantially more than you purchased it to pay the mortgage and settlement costs. Also keep in mind that home values don’t always increase, as witnessed during the housing crisis in 2008.
Two limitations you may encounter in qualifying for a physician loan are your credit score and where you plan to live. Most lenders will not provide a physician’s loan to borrowers with credit scores under 700. Also, lenders do not offer them in every state.
Additional Mortgage Options
If a physician mortgage is not available, and you don’t qualify for a conventional 15-year or 30-year mortgage, you have other options to finance a home, including:
FHA loans. Insured by the Federal Housing Administration, they enable lenders to take on more risk. That means buyers with lower credit scores can qualify, and they only require a 3.5% down payment. 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. These types of mortgages are available to US veterans, current military members and surviving spouses of veterans killed in the line of duty. Eligible buyers can obtain a VA mortgage with no money down.
Conventional 97 program. This program requires a 3% down payment and, unlike with most conventional mortgages, borrowers can use gifts to satisfy the down payment requirement. This program is only available to first-time homebuyers and those who have not owned a house the previous three years. It is also limited to 30-year fixed conventional mortgages.