About Physician Mortgage Loans

Like the VA loans that are specifically for Veterans, there are loan programs specifically for doctors. These special loan programs for doctors that can help them buy a home are called Physician mortgage loans.

What is a Physician Mortgage Loans?

A mortgage specifically for medical professionals that usually doesn’t require any down payment is physician mortgage loans or doctor mortgage loans.

With other loan types, if the borrower is making a down payment of less than 20% then the lenders want them to pay private mortgage insurance (PMI).

With a Physician loan, it is possible to skip paying for both a down payment and PMI if you are a doctor.

New medical professionals just entering the field can take the advantage of physician loans.

Doctors usually have a large debt-to-income ratio (DTI) after medical school and often have a drawback when applying for a regular mortgage in the earlier stage of their career because they are not able to provide proof of employment and income as they have just graduated or started their residency.

All these issues are taken into account by the physician loans and special allowances are made for the unique situation of a physician’s career.

A lender may not allow borrowers to take on a mortgage when they already have a large amount of debt and are just going to start out their careers, but with a doctors’ career, it is a different situation.

How the Physician Loans Works?

In many ways, a physician mortgage loan is different from a conventional mortgage loan.

The physicians will be able to buy a home earlier than they would with a conventional mortgage this is the biggest advantage of having a doctor loan.

For the new medical professionals, physician loans with their 0% to 10% down payment, no need for PMI, and flexibility with employment and DTI make it an easier and more affordable option.

The only disadvantage being, these types of loans usually don’t offer a fixed interest rate.

Private Mortgage Insurance (PMI).

If a borrower stops making payments on a loan a PMI protects the lender. Usually, when buying a home, if a down payment of less than 20% is made then the lender will require you to pay PMI.

Since it is dependent on the insurance rates, it varies, typically a PMI costs 0.5% — 1% of the loan amount each year.

Depending on the size of the loan that could be any extra monthly payment of hundreds of dollars.

With physician loans the new doctors are given the opportunity to pay off their medical school debt, so even if the borrowers have not made any down payment they don’t require to pay for PMI.

Debt to Income Ratio (DTI).

A DTI is the percentage measure of the money you spend on debt versus the money you have coming in.

For most conventional loans, your DTI should be 50% or lower. Lenders want to work with people who have little debt and can more easily manage their monthly payments so they check the borrower’s DTI.

When a borrower has a high DTI, they are considered risky to the lender.

Because of the thousands of dollars in debt, a new doctor would have accrued from medical school so, it is impossible for them to achieve a DTI of 50% or lower, this is taken into account by the physician mortgage loan and the DTI restrictions are more relaxed.

Though credit card debts, car loans, and other expenses are still examined, a recent medical school graduate is expected by lenders to have debt, so a high DTI is usually not an obstruction.

Borrower Qualifications

All doctors with the following degrees can avail of the physician loan programs.

• M.D.
• D.O.

Medical professionals like dentists, orthodontists, and veterinarians with the following degrees are offered loan programs by a few lenders:

• D.D.S.
• D.M.D.
• D.P.M.
• D.V.M.

To qualify the borrowers for a mortgage, the lenders require more than a degree.

The proof of employment and income needs to be provided by the borrower.

Since new doctors may be working in an internship, residency, or fellowship so the physician loans are flexible with these qualifications.

if the borrower does not have pay stubs or W-2s reflecting their current position for a physician loan, then lenders will usually accept a contract of employment to verify a doctor’s income.

Property Qualifications

If you are buying or refinancing a primary residence then only physician loans can be used.

Meaning, the home you are buying or refinancing, you need to live in it for the majority of the year.

You cannot use a physician loan to finance a second home or investment property.

Neither are the borrowers allowed to finance a condo with a physician loan.

Are Physician Mortgage Loans a Good Idea?

Compared to conventional mortgages the physician mortgage loans are useful to new doctors looking to buy a home.

Let’s understand the pros and cons to guide you if a doctor loan is the right choice for you.

Why you Might want a Doctor Mortgage Loan

If you’re a new doctor and can’t afford or qualify for a mortgage, you may still be able to buy a house with a physician mortgage loan because, you don’t have to pay for PMI or a down payment, and you have flexibility with the DTI requirements.

Neither do you require the typical proof of employment and income needed for most conventional mortgages, just an employment contract will be sufficient.

The Disadvantages of the Physician Mortgage Loans

The opportunity to buy a house when one otherwise would not qualify may be a great advantage but physician loans come with their drawbacks.

The first being a doctor loan doesn’t offer a fixed-rate mortgage, it would invariably be an adjustable-rate mortgage (ARM).

After the initial (teaser) period, the interest rate will fluctuate and often increase. ARMs always carry more risk than fixed-rate mortgages.

Along with the changing interest rates of ARM, doctor loans also sometimes have slightly higher interest rates.

Over time the interest rates add up, and in the long run, the physician loans end up being more expensive than a conventional mortgage, despite it being appealing initially.

There is also the risk of an underwater mortgage since the borrower start with 0% equity because they haven’t put a down payment on the house.

If the property value decreases or if the borrower can’t afford to make payments while they still owe the original loan balance, they could end up with a home loan that has a higher principal than the home is worth.

Conclusion

A physician loan can be a great choice for new doctors who are looking to buy a home, but as with all the other mortgage loans, one should always explore all their options to make sure that they are getting the best deal.

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