When buying a home, the average home buyer takes out a mortgage that typically requires good credit, a low debt-to-income ratio, and a down payment of around 20%. Unfortunately, as new physicians and despite high wages, many doctors are unable to meet the mortgage requirements due to high debt-to-income ratios. Because of this, many lenders offer what are known as physician mortgage loans. But what is a physician loan and are they worth it? These specialty loans help physicians qualify for a mortgage under special terms, however, they do come with pros and cons that you must consider.
What is a physician loan?
As a new physician, struggles with huge student debt and often low credit scores, make it difficult to qualify for a conventional mortgage despite having a significant income. In addition, saving for the down payment is often out of reach. Physician loans take this into account and offer specially-designed loans for physicians. These loans offer no down payment or mortgage insurance requirements, have high loan limits, and allow for a much higher debt-to-income ratio.
Who qualifies for physician loans?
Physician loans are available for physicians and healthcare professionals, including osteopathic physicians. Some lenders offer these loans to other healthcare professionals as well, such as veterinarians, dentists, and orthodontists.
How does a physician loan work?
A physician loan works similarly to a conventional loan except with more flexible underwriting ability. You are not required to make the traditional 20% down payment, nor are you required to carry private mortgage insurance (PMI). When making a lending determination, lenders look at the monthly debt payment amount and not the overall debt, such as student loan totals. This allows for more flexibility and a greater chance of qualifying for the mortgage.
In addition, physician loans have higher limits than some conventional loans, often allowing for the financing of homes greater than $1 million. However, because of the increased risk to the lenders, the interest rates may be slightly higher than conventional mortgages.
Do doctors get better mortgages?
When it comes to a physician loan, it isn’t so much that it is a better mortgage that a non-physician would qualify for, but rather that it is a mortgage that offers more flexibility in the underwriting process, allowing for a better chance of loan approval. Because of high student loan debt, many new physicians would never be able to qualify for conventional mortgages and a physician loan makes it possible. However, because of the increased risk to lenders, these loans can have higher interest rates, making them actually more costly in the long run than a conventional mortgage. Do they offer physicians a benefit when it comes to purchasing a home? Yes. But, in the long run, the physician pays for this benefit.
Are physician loans a good idea?
Whether or not a physician loan is a good idea depends on your financial situation. In many cases, a physician loan is the only way you may qualify for a mortgage, especially if you still hold a significant amount of med school student debt. However, keep in mind that you will pay for these additional up-front underwriting benefits with a higher interest rate and higher costs over the long term. If you can make a significant down payment, it may be more beneficial to try and qualify for a conventional loan with a lower interest rate. When determining which loan option is best for you, here are some benefits and disadvantages to consider when it comes to a physician loan.
- Little to no down payment, meaning 100% financing
- Higher debt-to-income ratio allowance
- Minimal credit, employment, and income requirements
- No private mortgage insurance requirements
- Higher loan limits, allowing for as much as $2 million in financing
- Adjustable-rate mortgages only
- Higher interest rates
- Can only be used for primary residences
- Increased risk of overleveraging and buying more houses than you can afford
Using a physician loan to get your dream home
If you are considering buying a home, it is important for you to evaluate whether a physician loan is your best option or if you are better off waiting until you can qualify for a conventional mortgage. While the physician loan does offer many upfront benefits, allowing you to buy your dream home sooner, you will ultimately pay more in the long run.
At Hero Home Programs, our goal is to help every potential homeowner find and move into the home of their dreams, and this includes healthcare workers. We work with borrowers to find their best loan options and help them navigate through the home-buying process. To learn more about how our team of professionals can help you find the home of your dreams, schedule a call with us today.