If you’re in your first year or two of practicing medicine or are still in your residency, buying a home might seem out of reach, especially if you have a hefty load of medical school debt. Getting approved for a traditional mortgage would be difficult if the ratio of your debt to your income (DTI) exceeds a certain threshold, typically around 40%. But there is an alternative: mortgage loans designed specifically for physicians, available through many well-known mortgage lenders.
In this brief Guide to Physician Mortgage Loans, we describe the basics of what lenders require to qualify for these loans, and the pros and cons for you as a consumer. While this approach may seem clearly superior to a traditional loan for a variety of reasons, a physician mortgage isn’t necessarily the right choice for all M.D.s. Since taking out a home mortgage is a major decision, it’s important to fully understand your alternatives.
Physician Home Loan Approval Criteria
While each lender has its own specific requirements and its own approval process, certain elements are common to qualifying for most physician mortgages. These loans are generally offered to attending physicians, fellows or residents, but know that dentists, veterinarians, optometrists and other specialty doctors may also qualify for this type of home loan.
As an M.D., it is fairly easy to qualify for a physician mortgage loan – easier, in many respects, than qualifying for a traditional mortgage. You will most likely need to supply the following to a lender:
Proof of your medical degree;
A signed contract showing that you are employed as a doctor, or that your job will start within 60 to 90 days;
A FICO score of ~700 – note that while some lenders accept a score as low as 680, others have stricter requirements and require a FICO of at least 720.
A debt-to-income ratio (DTI) no greater than 45%, excluding student loans.
Since the debt-to-income ratio calculation for physician mortgages excludes student loans, you can probably qualify even with a large amount of medical school debt. That offers a significant advantage over standard mortgages for a doctor with a big student loan balance. A lender may also offer “jumbo” loans at lower rates on physician loans compared to traditional mortgages, which can make a big difference in markets with high home prices.
Lenders rarely require you to be in your job for a minimum period to qualify for a physician loan, and may not require proof of income (such as paycheck stubs). Many banks offering physician mortgages only need you to provide an employment contract showing you have a job as a doctor, even if you haven’t actually started working yet. In some cases, a bank will approve your loans months before you start a new job, which can be important in a fast-moving housing market.
Down payments can be as low as 5%–10%, and some lenders even offer physician mortgages with 0% down, compared to 20% for traditional mortgages, without requiring you to purchase private mortgage insurance (PMI). Since PMI is expensive, that can make a big difference. A lower down payment eliminates another hurdle that often prevents cash-poor medical school graduates from buying a home. Why are lenders willing to offer these terms? Because doctors are low-risk borrowers who can almost always find work, just about anywhere.
All of these features can make physician home loans attractive, but there are some potential drawbacks to note before deciding whether this is the right choice for you.
First, physician mortgage loan rates are generally higher than rates on conventional mortgage loans, and both fees and origination “points” (an amount due upfront, when the mortgage is issued) can increase the all-in cost even more. For anyone thinking of buying a home (not just physicians), it is important to avoid buying more house than you can truly afford. If your monthly mortgage payments, property taxes, homeowner’s insurance and maintenance costs consume too much of your income, it introduces stress and interferes with other priorities in your overall financial plan. Taking out a larger mortgage than is prudent can be a temptation with physician mortgage products because it’s easier to qualify for larger loan amounts, even with a hefty outstanding student loan balance.
As mentioned above, some lenders offer 100% financing for physician mortgage loans. While buying a home with no money down may sound appealing, it can add significantly to the total amount of interest paid over the life of the loan. Also, if the housing market suffers a downturn and you need to sell your home quickly, perhaps because you are moving to take a new position, the proceeds from the sale may not be enough to repay your mortgage, which means you will have to use other savings to complete the sale.
Resident Physicians: Proceed with Caution
Many residents are already thinking about buying a house as their residency begins. However, this might not be a wise move (literally and figuratively), particularly if you use a physician mortgage loan product that involves fairly high fees. Residents are likely to move soon after completing their residency, and it often takes five years or more to “break even” on a home purchase. In other words, if you buy a home at the beginning of your residency and sell it when your residency is completed, there’s a decent chance that any increase in the home’s value over that period will not be enough to offset the fees and points you paid to obtain your mortgage.
Even if you expect to stay in the same geographic area, most doctors want to upgrade their housing after completing their residency. If you have already purchased a home, you may not recoup those upfront fees and points you paid when selling, and you will be faced with paying new fees and points to buy another home.
Another important issue to consider is the true cost of home ownership, which can be much greater than many first-time homebuyers realize. If the majority of your available income is used to pay your mortgage, property taxes and homeowner’s insurance, plus your student loans, you will find it difficult to replace a furnace, buy new furniture or do necessary landscaping.
What about the Mortgage Interest Deduction?
The interest paid on a mortgage and property taxes you pay reduce your taxable income if you itemize your deductions. However, the majority of medical residents are unlikely to itemize because the mortgage interest and property taxes on the amount of house you are most likely able to afford at this point in your career probably won’t exceed the standard deduction amount. Also note that the deduction for property taxes is limited, which may be relevant in areas with high home values.
In our view, residents and fellows are better served by renting, rather than buying a home. It provides more financial leeway, so that you can use some of your income to jump-start your retirement savings and pay down student loans. It makes you more flexible and mobile so that when your residency is complete you can move to your permanent job location without the risk of having to sell when the housing market may not be favorable. It also gives you time to save for a down payment so that you can qualify for a conventional mortgage loan at a potentially lower interest rate.
It can be difficult to compare physician loans with conventional loan products to determine which approach is a better deal for you, but it’s important to avoid making a costly mistake. Taking the time to understand how loan terms can affect your finances over time, you’ll be able to make an informed decision that can have long-lasting effects on your overall financial health. To better understand and compare mortgage alternatives, including physician loans, talk to a financial advisor who specializes in working with medical professionals and is knowledgeable about doctors’ unique and nuanced financial circumstances.
As a physician-focused financial planning firm, we have significant experience with the financial needs of M.D.s throughout the various phases of a medical career, from residency to retirement. As with all of the advice we offer, our goal in creating this brief article is to help you make informed decisions. We make no commissions from recommending physician loans or any financial products
Gold Medal Waters is a fee only financial planner located in Boulder, Colorado that specializes in serving the unique needs of physicians and high net worth clients. Coordinating a great financial plan isn’t easy. Learn more about what sets us apart, or talk to an advisor and get a free meeting to see if we are the right firm for you.