This is one of the most common mortgage questions we field. The answer is, it depends. It’s dependent on your personal financial situation and where you are in your career.
The loan that is right for you is the cheapest cost option that will accommodate your specific current situation.
So what exactly is a physician home loan and how can it help you?
In the simplest terms, a physician home loan has more liberal underwriting guidelines and take a more common sense approach, whereas a conventional loan is underwritten to more rigid and inflexible underwriting guidelines.
The Conventional Loan
When we talk about conventional loans, we’re talking about loans that are purchased by government sponsored enterprises (GSE’s). Over 95% of the loans in the country are purchased by GSE’s like Fannie Mae, Freddie Mac, or Ginnie Mae, and are conventional, VA or FHA type loans.
In most cases, it doesn’t matter which bank you go to, the vast majority of their loans are being sold to the GSE’s and therefore underwritten to their exacting underwriting guidelines. The bank (Wells Fargo, Chase, Bank of America, etc.) you receive your loan from typically remains as the servicer on these conventional loans, billing you every month, collecting your payment, administering your escrow account, managing your taxes and insurance and providing you with a payoff when you want to pay off your loans. In most cases, that’s all they do. They don’t actually own the loan anymore, they simply act as the loan servicer and get a premium for doing so.
The loan itself is then bundled with a bunch of other loans that are similar to yours and then sold to Fannie Mae and Freddie Mac, which in turn bundle them and sell them as mortgage-backed securities (bonds secured by mortgages) on Wall Street. Because Fannie and Freddie are government-sponsored enterprises making loans from coast to coast, they must have sweeping, rigid guidelines in order to maintain consistency in the kind of loans that are delivered to them. This is the biggest market for mortgages and therefore they typically can offer the lowest interest rate to you as a borrower. In order to qualify for a conventional loan, your situation has to match their rigid guidelines exactly, or fit inside their “underwriting box,” as I call it. So a physician home loan is not a loan that is typically going to be sold by Fannie Mae and Freddie Mac; many physician clients are simply out of the box.
The Physician Home Loan
In general, a physician home loan is a portfolio loan product meaning that the bank or institution that is making the loan is actually going to keep and service the loan. That enables the bank making and servicing the loan to determine its own underwriting guidelines and risk threshold. This results in more liberal guidelines for physicians than it would for other people.
There are several benefits of a physician home loan over a conventional loan:
- Higher chance of approval. When some outside-of-the-box factor makes you ineligible for conventional financing, a physician home loan might be the only option. More often, residents, fellows, and newly attending physicians are approved with physician home loans and declined with a conventional loan because they just don’t fit the guidelines due to student loans, time on job, down payment, etc.
- Low down payment. The physician home loan will finance somewhere between 90 and 100 percent loan to value depending on the bank making the loan, where you are in the country and the loan amount you are seeking.
- No PMI (private mortgage insurance). I’m not aware of any physician home loan that has PMI. This is because the banks offering these loans are portfolio lenders, PMI is typically required on conventional loans with loan amounts greater than 80% of the home’s value or purchase price. Portfolio lenders do not typically charge PMI but do have a slightly higher rate than what is quoted for A paper conventional loans. Typically the physician loan is going to save you .5% to 1% in annual PMI, but you will pay .25% to .5% higher rate for the loan type. Essentially the bank making the physician mortgage loan is willing to underwrite the loan with more liberal guidelines (less down, student loan payments not counted, close before you begin employment), but in exchange, they charge a slightly higher rate. In most cases, if you qualify for a conventional loan and you have 20% down, your overall costs will be less with conventional financing. If you have less than 20% down payment or don’t qualify for conventional, then the physician mortgage is going to be the most advantageous. Most loan officers who offer physician home loans also have conventional loans available for their clients.
- Student loan(s) not counted against your debt-to-income ratio. This is a significant difference between a physician home loan and a conventional loan, particularly for someone transitioning into residency, fellowship or early in their attending career where student loans might be deferred or in IBR (income based repayment). Conventional underwriting guidelines do not allow you to exclude payments for any deferred loans, income-based repayment loans, or loans in forbearance. In any case, where the current payment is zero, conventional guidelines require underwriting to count that debt against your monthly debt-to-income ratio at 2% of the outstanding balance. So if you are a resident, with $150,000 in deferred student loans, conventional guidelines require that we calculate your monthly student loan payment at $3,000 per month (2% of $150,000), which on a resident salary means you will qualify for a Cracker Jack house. Physician home loans will typically allow you to exclude or use an IBR payment to qualify.
- Higher loan limits. Because physician home loan lenders don’t sell the loans Fannie and Freddie, they are not going to have the conventional loan limits. The loan limits will vary by where you are in the country and by the institution that’s making the physician loan. But typically you’ll be able to borrow a higher amount with less money down on a physician home loan than you would on a conventional loan.
- Ability to close before starting work. This is a huge benefit to our physician clients. Most conventional mortgage lenders will require that you have 2 paycheck stubs before you close on your new home. A physician home loan will allow you to close prior to starting work. Some physician home loans will allow you to close as far as 90 days before you start your new job and qualify based on the employment contract or offer letter. For clients with families, this is a big deal and can save you the trouble of having to move twice.
- Flexibility on proof of income, enabling an earlier home purchase. Conventional underwriting guidelines typically require 2 years’ worth of tax returns for proof of income if you are self-employed or a 1099 independent contractor. We see a lot of emergency medicine, anesthesiologists, and dentists, who are commonly 1099. These clients may have to wait until they have 2 full years’ tax returns, which often means nearly 3 years on the job before they can qualify for conventional financing. A physician home loan will allow a 1099 or self-employed physician to qualify with as little as a 6-month history of income, enabling you to buy a home almost 2 years earlier with a physician loan than you could with a conventional loan.
One more intangible benefit of the physician home loan may be the people who are helping you with the loan, the loan originator, processor and underwriter. If they’re in the business of administering physician home loans, then these folks are much more likely to understand the unique situations and circumstances which are commonplace for physicians. You’re dealing with people who are more specialized and have seen everything you’re going to throw at them. The process and your experience moving through the loan is going to be better with someone who’s a pro at working with physicians.
Josh Mettle is an industry leading mortgage lender and published author, specializing in financing physicians, dentists, fellows, PhDs, and physician assistants. You can find information on his new book and get more physician focused real estate and mortgage advice at: www.whyphysicianhomeloansfail.com or www.physicianfinancialsuccess.com.