A Guide to Physician Mortgage Loans

What Is a Physician Mortgage Loan?

A physician mortgage loan, also known as a doctor mortgage loan, is a special program that is issued by banks to attract high-income individuals by allowing eligible healthcare professionals to get approved for a mortgage with fewer restrictions than a conventional mortgage. These loans allow eligible healthcare professionals to receive a mortgage with no down payment, no credit history, no job, and a high debt-to-income (DTI) ratio. They are also considered jumbo loans because they allow higher loan values than conventional or government-backed mortgages.

Banks provide such loans with minimal requirements because they believe that the clients’ income potential provides security against risks of having high student loan debt and no income history. Because of this perceived low risk for lenders, physician mortgage loans have a competitive interest rate and they do not require private mortgage insurance (PMI), making it a very attractive deal to eligible borrowers.

The intuition the lenders use to justify such loans is the fact that healthcare professionals are very likely to have a high-income stable job. Even with attributes such as high debt-to-income ratio, no credit history, no employment history, and no cash for the down payment, healthcare professionals are not considered high-risk individuals.

Who Qualifies For the Loan?

Not every healthcare professional automatically qualifies for this loan. Lenders are free to choose their criteria to qualify borrowers for this loan, so a healthcare professional should always consider multiple lenders to find the best mortgage for their objectives. Even though the list of qualifying medical professionals vary by lender, there are some common degrees that most lenders tend to qualify:

• Medical Doctors (MD)
• Doctors of Osteopathy (DO)
• Doctors of Dental Medicine (DMD)
• Doctors of Dental Surgery (DDS)
• Doctors of Podiatric Medicine (DPM)
• Doctors of Veterinary Medicine (DVM)
• Doctors of Optometry (OD)
• Doctors of Pharmacy (PharmD)
• Doctors of Chiropractic (DC)
• Nurse Practitioners (NP)

Apart from having a specific degree, mortgage lenders also look at the credit score of a borrower. Typically, lenders tend to provide physician loans to individuals who have a credit score of at least 720 - 740. It is possible to find lenders who are willing to provide physician mortgages to borrowers with a minimum credit score of 680 as long as the borrower has 6 to 12 months of cash reserves. It is important to note that lenders may require a higher interest rate the lower the credit score is. If buying a house is not an urgent matter, then eligible people with a poor credit score may be better off waiting and building their credit score before financing a house.

How Do Physician Mortgage Loans Work?

Physician mortgage loans do not differ widely in the way they work from conventional loans. The only difference is that physician mortgage loans have fewer restrictions on the loan, which may benefit greatly eligible borrowers.

The biggest difference between physician mortgage loans and conventional loans is that a borrower who qualifies for a physician mortgage can put down less than 20% for a down payment and avoid private mortgage insurance premiums that usually range from 0.55% to 2.25%. On the other hand, due to lower down payment and waived PMI requirements, lenders typically set a higher interest rate on these mortgages. The mortgage rate on a physician loan may be 0.125% to 0.25% higher than a mortgage rate on a conventional loan. Another way lenders tend to upcharge the borrowers taking mortgage loans is through higher fees such as a higher mortgage origination fee. It is wise to shop around because different lenders may offer different solutions, and some may fit better than the others.

Physician mortgage loans also offer a high mortgage limit. These loans are considered jumbo loans because they offer mortgages that are higher in value than the maximum limit set by the Federal Housing Finance Association (FHFA). This means that eligible borrowers may get a mortgage for a house that is more expensive than a conventional mortgage can offer. As of 2021, the baseline limit for conventional mortgages is $548,250, which is used in most counties. Even though a higher limit means that eligible borrowers may get a bigger and better house, borrowers should be cautious when choosing an overly expensive house. Just because a borrower is approved for a certain mortgage amount does not mean that the borrower can afford to spend that amount.

Physician mortgage loans may sound like a great deal, but the borrowers should be aware that this type of loan may also lead to unexpected negative outcomes. Healthcare professionals tend to have a high amount of debt due to their tuition fees and buying an unaffordably expensive house may worsen the situation. Because of these outcomes, a borrower should weigh in all pros and cons before choosing to apply for a physician mortgage.

• Little to No Down Payment

  Physician mortgage loans allow little to no down payment. Usually, physician mortgages provide a loan with Loan-to-Value (LTV) ratio of 90% - 100%. This means that people who are eligible for this kind of mortgage may be able to buy a house without having any cash. For comparison, the down payment a conventional mortgage requires is usually between 3.5% and 20%.

• No Private Mortgage Insurance

  One of the biggest advantages of physician mortgages is the fact that it does not require PMI. PMI premiums range between 0.55% and 2.25%. This insurance is often required for conventional mortgages when a borrower pays less than 20% in down payment. These premiums may add up quite quickly and in some cases may double the interest expense a borrower has to pay on their mortgage. Avoiding this insurance, a borrower saves their money and does not lose anything since the insurance covers a lender.

• High Mortgage Limit

  Physician mortgages are considered jumbo loans because they provide financing that is above the maximum limit set by the Federal Housing Finance Association for conventional loans. This means that a qualified borrower may get a more expensive house than a conventional mortgage can afford. Another distinction of physician mortgages compared to jumbo loans is that they do not require a down payment while jumbo loans usually require a 20% down payment.

• Special Consideration For Student Loan Debt

  Lenders understand that healthcare professionals may have a high amount of student loan debt. Even though their debt to income ratio may be terrible, lenders do not consider them high-risk borrowers because their income potential outweighs the risk of high debt. In addition, healthcare professionals most often get a secure high-paying job, so it is expected that they will be able to pay off all debt. Because of these reasons, healthcare professionals may get approved for a mortgage loan when a regular person may not.

• Approval For Mortgage Before Working Begins

  Healthcare professionals have to spend a lot of time studying and practicing before they are able to work in their field. Lenders understand that it takes a long time for them to complete school. On the other hand, lenders also realize that it is highly likely for them to get a secure high-paying job in the field they are interested in. Because of that, lenders are willing to lend out mortgages to qualifying individuals even when they don’t work yet. This means that a healthcare professional may be able to get a house even before they complete their training.

• Higher Interest Rate

  The most obvious downside of physician mortgage loans is their interest rate. These mortgages tend to have a higher interest rate than on a conventional mortgage. Interest rate may also depend on the credit score of a borrower, which means the lower the credit score the higher the interest rate. Since physician mortgages tend to be higher in value than conventional mortgages, a borrower may want to increase their credit score before getting a mortgage to get a better interest rate on the mortgage.

• Too Much Leverage

  Physician loans may offer an LTV ratio of up to 100% on very large mortgages. A borrower may be faced with very large mortgage payments that will have to be paid off for a long term. Depending on the borrower’s lifestyle, they may not be able to keep up with large payments without limiting their spending. In the worst case scenario, a borrower may not be able to repay the loan, which would get their property into a foreclosure process.

• Buying More Than One Can Afford

  The last downside that comes with physician loans is the fact that they allow certain borrowers to get into debt that they cannot afford. Many people, including healthcare professionals, assume that if they get approved for a certain amount of mortgage, then they can afford to spend it. In fact, it is not true because lenders often approve borrowers for larger mortgage amounts than they can afford. This leads to overconsumption by the borrowers, and when the time comes to pay, the borrowers are required to scrape by to ensure repayment. Borrowers should be aware of the amount they can afford to spend and make sure to limit spending within the amount allocated.

Physician vs Conventional Mortgage Loan

Physician mortgages and conventional mortgages differ quite a lot in their structure, but it is simple to decompose every difference and compare them between each other.

Interest Rate

Conventional mortgages tend to have a lower interest rate. Conventional mortgages are the ones that usually have the lowest interest rate available out of all types of mortgages. Physician mortgages have a slightly higher interest rate. Usually physician mortgages have an interest rate that is 0.1% - 0.25% higher than the interest rate for conventional mortgages, but the difference varies depending on the credit score of a borrower.

Minimum Down Payment

Conventional mortgages usually require a down payment of at least 3% for conforming mortgages and at least 5% for non-conforming mortgages. In addition to that, a standard down payment amount is considered 20%. On the other hand, a physician mortgage allows one to purchase a house without putting a down payment at all. In this sense, physician mortgages allow a down payment of 0%.

Private Mortgage Insurance

When it comes to conventional mortgages, borrowers who put down less than 20% are often required to pay for a private mortgage insurance that is supposed to protect the lender against default. Most conventional loans allow a borrower to stop paying for private mortgage insurance when the LTV ratio of the mortgage is below 80%. Physician mortgages do not require PMI at all. Even if the mortgage has an LTV ratio of 100%, a borrower with a physician mortgage does not have to purchase PMI.

Loan Limit

Conventional mortgages are regulated by the Federal Housing Finance Association (FHFA). This agency sets a limit for the maximum mortgage amount a conventional loan can be issued. As of 2021, the loan limit for conventional mortgages is $548,250. Unlike conventional mortgages, physician mortgages are considered jumbo loans because they do not have a mortgage limit. This means that a qualifying borrower may be able to buy a house for well over $548,250 without making any down payment.

Credit Score

Conventional mortgage loans require a lower credit score compared to physician mortgages. A borrower may get a conventional mortgage with a credit score of at least 620. It is also possible to get a government-backed mortgage with a credit score of at least 500. Physician mortgages, on the other hand, require a higher credit score. Most of the banks will require a credit score of at least 720 to qualify for physician mortgage.

Proof of Income

Since physician mortgages provide loans to healthcare professionals who do not have a job yet, they do not require any proof of income, but they do require a proof of a degree. On the other hand, conventional mortgages usually require proof of income to ensure that a borrower can pay off the loan amount.

Who Offers Physician Loans?

Many lenders may consider providing a physician loan to a healthcare professional. An individual who would like to use this loan should shop around and see what different lenders offer. Lenders may impose different rules and may favor some healthcare professionals over the others, so it is important to look at all the options available before choosing an option. The most common providers of physician loans are the following:

• Bank of America
• BMO Harris Bank
• Citizens Bank
• First National Bank
• Huntington Bank
• TD Bank
• United Community Bank
• U.S. Bank
• Valley National Bank