How Do Physician Loans Work?
Physician loans work differently from conventional mortgages in a few ways. The main benefit of having a doctor mortgage loan is that with it, physicians are able to buy a home earlier than they would with a conventional loan.However, unlike conventional loans that can have fixed and adjustable interest rates, physician mortgages are only available as adjustable-rate mortgages (ARMs).
With an ARM, you typically pay a lower, fixed interest rate for the first few years of the loan. Even though this initial period is temporary, it can give borrowers the opportunity to pay down other debts, like student loan repayments.
A down payment of 0% – 10%, no PMI requirement and flexibility with employment and DTI make physician loans an easier and more affordable option for new medical professionals.
Let’s break down the details of how exactly a physician loan works.
Private Mortgage Insurance (PMI)
PMI exists to protect your mortgage lender if you stop making payments on a loan. Usually, if you make a down payment of less than 20% when buying a home, your lender will require that you pay PMI.
It’s based on insurance rates, so it varies, but PMI typically costs 0.1% – 2% of your loan amount per year. That could be hundreds of dollars extra on a monthly payment, depending on the size of the loan.
Physician loans aim to give new doctors the opportunity to focus on paying off their medical school debt, so they don’t require borrowers to pay for PMI at all, even if they didn’t make a down payment on the house.
Debt-To-Income Ratio (DTI)
Your DTI is a percentage that measures how much money you spend on debt versus how much money you have coming in.
For most conventional loans, it’s required that your DTI is 50% or lower. Mortgage lenders check your DTI because they want to work with borrowers who have little debt and can more easily manage their monthly payments. If a borrower has a high DTI, they’re considered risky to the lender.
For a new doctor, it may be difficult or even impossible to achieve a DTI of 50% or lower due to accumulated medical school debt. Physician home loans take this into account and are more relaxed with DTI restrictions.
Credit card debt, car loans and other expenses are still examined, but lenders expect recent medical school graduates to have debt, so a higher DTI is not always a dealbreaker.
Physician Loan Alternatives
If you’re not sure a physician loan is for you, there may be other home loan options. While not all alternatives will be available right away to those starting a medical career, those that are may save you money in the long run and better suit your needs.
Apply For An FHA Loan
An FHA loan is a loan backed by the government and insured by the Federal Housing Administration. FHA loans have less stringent requirements for borrowers' credit scores, DTI and down payments compared to other types of loans.
While FHA loans can be a great option, there are restrictions on how you may use them. Whether you choose an FHA or physician loan depends on the value of the property you’re buying. There are lending limits with FHA loansand in most places, the floor and ceiling are about $472,030 and $1,089,300, respectively. Physician home loans will usually lend you more depending on where you’re at in your medical career.
If you’re looking for a fixed-rate mortgage with less strict requirements, though, an FHA loan might be a great choice. If you want to avoid ARMs but don’t qualify for a conventional mortgage, an FHA loan is the way to go.
Apply For A VA Loan
VA loans are loans offered to qualified veterans, active service members and qualified spouses. These loans are backed by the Department of Veterans Affairs and allow past or present service members to qualify for a less expensive mortgage, even if their credit isn’t the best.
With VA loans, you don’t have to make a down payment or pay PMI. VA loans do have a lower lending limit than physician loans, but they also tend to have lower interest rates. You have to meet the requirements for time served in the Armed Forces to qualify, but if you happen to, a VA loan can be a great choice.
Save For A 20% Down Payment
If you don’t mind waiting until you’ve paid off some debt and are able to save money, you can make a down payment of 20% on a conventional loan. By putting 20% down, you will be able to avoid paying PMI and start with some equity in your home.
Keep in mind that you’ll have to meet the requirements to qualify for a conventional loan, which include a lower DTI, higher credit score and documents to verify your employment. You may not be able to qualify for a mortgage this way until later on your medical career path, but you’d be able to take advantage of potentially lower rates and the bonus of starting with equity already built in your home.
Get A Conventional Loan With PMI
If you qualify for a conventional loan but can’t afford to put the full 20% down, you can still make as large a down payment as you are able to and pay for PMI. Any size down payment is helpful because it reduces the amount of interest you will ultimately have to pay on your loan.
While you will have to deal with the extra cost that PMI adds to your monthly payment, PMI allows you to get a mortgage faster at a rate that is lower than what you’d pay with a physician loan. Plus, you won’t have to worry about your interest rate increasing with a fixed-rate mortgage.
Keep in mind that you won’t have to pay for PMI forever. Once your home reaches 20% – 22% equity, your PMI payments will be canceled.
Refinance From An Existing Physician Loan
If you already have a physician loan, refinancing can be a viable option. If you’ve paid off some debt, built equity and increased your income, you may be in a great position to refinance into a conventional loan.
If your physician loan is an ARM, you could also consider switching to a fixed-rate loan if you’re able to get a lower rate. You might also consider refinancing to a shorter loan, which would increase your monthly loan payments but allow you to pay off your home much faster and avoid accruing too much additional interest.
If you’ve built equity in your home and have more money than you started your loan with, refinancing to a conventional mortgage may be your best bet. Refinancing into a new physician loan may get you a better deal than you had before, but conventional mortgages can offer more security and potentially less interest at this stage of your mortgage payments.
