How The Homebuying Process Works With The Physician Loan

So you’ve graduated medical school or started your residency and are ready to put down some roots and buy a home. However, as a medical professional new to the field, you’re likely to run into some issues trying to secure a mortgage thanks to your high amount of student debt, little cash, and low or no credit. 

Don’t worry – there are loan programs designed specifically for physicians to help them through this. They’re called physician mortgage loans (also known as physician mortgages, physician loans, and doctor loans), and you might be able to secure one with ease.

Sound too good to be true? Here’s what to know.

What to know about a physician loan

What is a physician loan?

A physician loan is a mortgage designed specifically for those in the beginning stages of their healthcare career. 

As such, these individuals have more trouble securing a mortgage than the average homebuyer, due to elements such as a high debt-to-income ratio, no proof of employment (or having just started residency), and little cash.

Physician loans keep these things in mind and make special allowances for them, thus becoming more forgiving than a conventional mortgage. That’s because lenders see a physician’s potential career trajectory rather than their debt. They will, after all, earn an impressive salary in the future and therefore be less likely to default on their loans.

How physician loans work

Physician loans are similar to conventional mortgages with a few notable differences:

No down payment or private mortgage insurance (PMI)

When it comes to a conventional mortgage, borrowers must put down at least 20% or pay for private mortgage insurance (PMI), whether private or government. The PMI costs can add up quickly and can increase monthly payments by hundreds of dollars.

With a physician loan, there’s no need for PMI, regardless of the down payment. You could even put down nothing at all and still avoid a PMI!

A high debt-to-income ratio is okay

Unlike a conventional mortgage, a high debt-to-income ratio (DTI) isn’t as likely to impact your chances of securing a loan. 

In most situations, a borrower with a high DTI ratio would be a red flag, but lenders understand that doctors have high DTIs due to debt. In fact, some programs don’t even consider medical school debt if the payments are deferred or in forbearance, which makes qualification even easier.

Proof of employment

Conventional mortgages require that a borrower supply proof of employment and income to lenders. The rule is hard and fast, and proving that you’re “about to accept a job” or “about to get paid” isn’t enough.

Even if the residency or position hasn’t begun, someone taking out a physician loan can satisfy this requirement just by showing the lender an employment contract.

Higher limits and better financing

Conventional mortgages have a strict borrowing cap. In 2022, the limit is just under $650,000 for most parts of the country and $970,800 in more expensive housing markets, such as Los Angeles and New York City.

Physician loans, however, offer extremely high limits. Though they vary based on the lender, they’re typically worth $1 million or more with up to 100% financing.

Physician loan eligibility

Physician loans are generally available to any medical doctor with an MD or DO degree, but several loan programs extend to other medical professionals including nurse practitioners and nurses, physician assistants, and pharmacists.

It should be noted that only certain types of properties are eligible for a physician loan. They can only be used for primary residences (no investment properties), but the type of home also matters, as condos and townhomes are typically not eligible.

What to keep in mind when deciding to take out a physician loan

Several benefits come with securing a physician loan, but it’s important to do your research before making the decision. Some things to consider include:

Higher interest rates. While these loans do allow for waived PMIs and lower down payments (if any at all), those do come at a cost. You’ll likely be faced with interest rates 0.125% to 0.25% higher than a conventional mortgage and/or higher fees.

Your credit score needs to remain good (in the 720-740 FICO score range) to secure a physician loan.

What can you truly afford to buy? Yes, a physician loan offers an incredibly high limit and great financing, but don’t bite off more than you can chew in terms of a home. Spend and save responsibly.

Your rates are adjustable and can change at any time, for better or for worse. A physician loan is rarely a fixed-rate mortgage, so you’ll likely end up with an adjustable-rate mortgage. With these, you’ll pay a lower fixed interest rate for a few years before the rate begins to fluctuate and increase, so budget appropriately.

You can refinance at any time. Most physicians choose to refinance after a few years if their income or credit score has gone up, their DTI has been reduced, the mortgage has been paid down, or the home has appreciated.

How long will you be there? In answering this question, you need to be honest with yourself. You could be there for 20 years, but you’ll likely be there for as little as one to five. The general rule of thumb is to stay in a home for at least five years in order to break even – or more if the real estate market crashes. Truly weigh your options and look into renting if you’re not sure.

Physician loan alternatives

If you decide a physician loan isn’t for you but still want to buy a home, you do have other options, including a conventional mortgage.

You might also consider what’s called a combination mortgage, better known as an 80/10/10 mortgage. This requires you to get two mortgages at once: one for 80% of the purchase price and another for 10%. The remaining 10% will be covered by your down payment.

An FHA loan is another option. It’s easy to qualify for and calls for lower down payments and credit scores, but you will likely face a higher PMI. 

The decision to take or leave the physician loan isn’t an easy one. Whatever you decide, do so responsibly. Evaluate several lenders and weigh your options – consider even speaking with a financial planner to determine what’s best for you, your future, and your financial needs.

This material is for informational purposes only and is not intended to provide financial, legal, tax, nor any other professional recommendations or advice.

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