[Editor's Note: This is a guest post from long-time WCI advertiser, guest poster, podcaster, and author Josh Mettle with Fairway Physician Home Loans. Josh is an expert in “physician” mortgages. This post addresses an important issue many physicians run into when they go to buy a house–how are their increasingly massive student loans treated. This is not a sponsored post, but we obviously have a financial relationship.]
Will Student Loans Prevent Millennial Physicians From Buying a Home?
Being declined for a home loan is no fun; being declined the week before closing due to student loans is a nightmare. As student loan debt has become the second largest liability behind home mortgages in the country, we’re seeing more and more millennial physicians having trouble getting approved for financing.
Conventional Mortgages and Student Loans
Josh Mettle
Conventional loans (as well as many physician loan programs) typically require you to qualify with a fully amortizing student loan payment. If the student loan servicer cannot provide an amortizing payment in writing, the lender defaults to showing 1-2% of the outstanding balance as a monthly payment. That $200k in student loans with a $57 Income Driven Repayment (IDR), can and most likely will, be calculated as a $2,000 to $4,000 a month payment when being underwritten and qualified for a mortgage. This can be problematic for those going the Public Service Loan Forgiveness (PSLF) route and for those with higher loan balances and lower income in the early years of practice.
Student Loans and Dodd-Frank
With the passing of the Dodd Frank Act, The Consumer Finance Protection Bureau’s (CFPB) “ability to repay” rule requires lenders to PROVE the borrower’s ability to repay a home loan. This rule creates challenges for production-based physicians and self-employed or independent contractors with less than two years tax returns. It also creates challenges for millennial physicians that have student loans, as many mortgage underwriters have defaulted to these higher repayment calculations (1-2% monthly) to ensure they are taking the most conservative approach and following the “ability to repay” rules.
Surprising Benefits of Having Student Loans
A recent joint study by Experian credit bureau and Freddie Mac, the government sponsored enterprise and purchaser of conventional mortgage loans, has concluded:
- Millennials with student loans have higher credit scores than millennials without student loans.
- Millennials with higher levels of student loans actually have higher credit scores than millennials with lower amounts and with no student loans.
Take this with a grain of salt. For some reason the credit bureaus have decided that piling up debt and using government IDR programs to minimize payments somehow makes someone a better credit risk to lend to. I’m sure there is nothing incestuous going on here between the credit bureaus and the industries that recognize that millennials are the next demographic wave after the baby boomer generation and they are going to need good credit to enable them to buy more stuff.
The point is, student loans will not stop millennials from buying a home on a credit basis, and they might actually help. Even though conventional mortgages and some physician mortgage programs essentially ignore the government income driven repayment programs, other programs will allow you to qualify with either a zero or minimal IDR payment when obtaining a mortgage. You will need to search to find them, because many physician home loans programs require that student loans be placed in deferral for twelve plus months before excluding them from qualifying debt rations. Not all student loan servicers will allow this, not to mention the frustration of dealing with your student loan servicers.
It’s important for you to know, not all physician home loans have the same underwriting guidelines, if you get a NO from one lender, find another and make sure to ask them how they count your student loans against your debt to income ratio. If they will not allow you to qualify with a zero or minimal IDR payment, it’s likely going to be harder for those with substantial student loan debt to qualify for their program. Find another physician home loan lender and keep asking the question until you get the right answer.
[Editor's Note: I keep a list of lenders who do physician mortgages. My definition of a physician mortgage is:
- No PMI despite a down payment of < 20%.
- Able to close with a contract before starting the job (i.e. no pay stubs required)
- Ignores or gives special treatment to student loans in the underwriting process, particularly if in an income driven repayment program
Josh's post does a good job pointing out that there is significant variation in how any given physician mortgage lender/program deals with # 3 so if you have student loans and especially if you are in an Income Driven Repayment plan (IBR, PAYE, RePAYE) you need to sort that out in your first conversation with the lender. Of course, this all assumes you're going to buy a house while in an IDR program anyway, which I would argue is often a mistake, although a common one, and sometimes, particularly in the last five years, you may even get rewarded for making it. After residency, when you're making full payments, do you really want a mortgage so large that when combined with your student loans it runs up against mortgage lending guidelines? I would hope that you would stay far below the guideline ratios, but there are many situations where doctors just get caught in weird lending conundrums that don't make sense, and the more flexible physician mortgage programs are ideal for them. They are also available for many other high income professionals.
Physician mortgage loans can make sense in other situations too (such as when your limited cash flow would be better used to pay off student loans or max out retirement plans instead of for a down payment) but never assume that just because someone will lend you money that you should take it. Easy financing often leads to overspending.]
What do you think? Did you use a physician mortgage? Why or why not? If you did, who did yours and how did they treat your student loans? Comment below!
I have just applied and been approved for a physician loan with Sun Trust Bank. STEPHANIE ARCELAY is our contact person at Sun Trust. She has been extremely helpful and responsive. Time from application to approval was 3 weeks. I highly recommend Stephanie, the loan approval process has been seamless.
We also worked with Bank of America and Regions Bank, both were very easy to work with as well. Sun Trust, however, offered us the lowest rates.
However, there is a “cost” when you do not secure local financing. We are buying in a very competitive market in South Florida. The appraiser contracted by Sun Trust came in with a valuation 150K below sale price. The appraiser did not consider any comparable sales data provide by our realtor to support the price. Sun Trust does have an appeal process which requires convincing the original appraiser that they are wrong. In the end we withdrew our offer because it was impossible to justify this 150K gap between appraisal and sale price.
Our realtor has urged us to seek financing through a local bank that employs appraisers who have a better understanding of the local market. This of course means a conventional 80% loan. Instead, we are trying to find another property that can appraise at sale price. I’m not so sure they exist in our area. Just be forewarned, if you are buying in an overheated market, it may be difficult to actually obtain a appraisal that justifies a 95% loan.
“The appraiser contracted by Sun Trust came in with a valuation 150K below sale price. The appraiser did not consider any comparable sales data provide by our realtor to support the price.”
Sounds like a feature, not a bug. The appraiser did you a solid and saved you from making what had a high probability of being a poor financial decision.
I agree. The problem in this area is that most homes seem to be 100k+ over value. Not yet convinced that buying a home is the best financial investment.
I have used Sun Trust for my mortgages and they have typically been good. The rates are always the lowest when shopping around for Physician’s loans.
You do, however, have to live in an area Sun Trust services or have a long standing relationship with them (I was able to get a Cali home loan because I have been a customer for close to 10 years).
My only issue with them is getting the underwriter’s approval for the loan. It always seems to occur at the last minute despite my part in getting all of the forms, paperwork, etc. to them in a timely manner. This can be stressful and is my only complaint about working with them.
Are you a serial physician mortgage user? That might be an interesting story to hear.
Yeah it sounds like waiting for the market to cool is a good idea. Gives you more time to save for a down payment and to pay off student loans.
The first thing I’d do with that appraisal is show it to the buyer and make a much lower offer. They might not take it, but it’s a huge negotiating piece for you.
Glad you had a great experience with Stephanie, who has been a long-time advertiser here.
A word of caution- when appraisals seem really low, I would be extra cautious, as it might mean you are dramatically overpaying. I’ve personally been ripped off due a situation where a “local guy” was in cahoots with an appraiser. I’d also be careful buying in a “competitive” market. That often doesn’t end well.
I’ve read a few articles recently that are suggesting the PSLF program is sending out rejection letters when applicants are trying to recertify. We decided against this path, but I’m curious if the dept of ed is going to find a loophole to get out of forgiving a bunch of student loans that people had been banking on.
There’s one article and the people it references weren’t even working for a 501(c)3. Not sure I’d draw much conclusion from it.
https://www.wsj.com/articles/student-debt-may-prevent-some-americans-from-buying-homes-1491230359
This is from yesterday’s journal – no necessarily about physicians but applicable.
I was able to buy using a “Doctor Loan” but I also had a very high starting income and bought a home that is less than one year’s salary. We did the refinancing already, partially because we were out of control with our spending and wanted to do it while we had the cash on hand (~2.5 years ago). Looking back, we should have waited to refinance until after my loans were paid off, but now we’ve got the 2nd mortgage paid off, almost done with student loans AND have some equity in our house.
We did a physician home loan through Josh’s group last year. Even though we only had a signed contract for residency and had median debt, they walked is through the process and got everything figured out. It was a surprisingly complicated process (it was also our first time), but after working with them we eventually closed on the home we wanted.
Was it the best financial move? I have no idea. But they did a good job working with us through the process and making sure that student loans didn’t kill the deal. I am happy with how things worked out. Joel Stice was our Kansas agent and I have recommended him to other residents who are looking at buying a home.
I looked at Physician Home Loans first when we purchased our home in May 2016 thinking they would make a sweet offer having the understanding that I would be a safe bet to lend to. However, they all came in well over 0.5% higher than the current 15 year fixed market rate.
I then decided to go bank to bank in our small town and suddenly found myself in a bidding war for our business. Through Chase were able to obtain a 15 year fixed conventional loan despite not having 20% down and they eliminated all closing costs and made us “private clients” despite not meeting typical criteria.
Like Peggy our home ended up being appraised 55K less than what we agreed to pay for the house. We actually used this to negotiate down the sale price of the home by 20K and then we had to pay the difference out of our down payment to secure a conventional loan. We ended up with a PMI ($54/month) until our loan to value was under 80% which was quick.
Bottom line, we tried our best to heed the advice of White Coat Investor and live like residents until we were in a position to take advantage of the banks, not let them take advantage of us. Also, take the time to personally stop at your local bank branches and speak to their mortgage representatives as you may be surprised at the response you receive. Finally, if your only way of obtaining a home is with a Physician Home Loan, make sure you truly need the house other wise your not going to get the best deal on one of the biggest purchases of your life.
I suppose this is an informative article? But I think the idea behind it, ESPECIALLY for residents, is not the best. I know there are exceptions to every rule but if you have massive student loan debt maybe buying a house isn’t the best idea . . .
I obviously agree with you as noted in the editor’s note at the end of the piece.
I found our local bank provided a “physician loan” that in the end wasn’t totally ideal but still worked out fine. I was able to avoid PMI by qualifying for a mortgage asking 20% down, and then a credit line offered at 4% interest (variable) that financed 10% (half the down payment). So for a 500k house I put down 50k which was doable for me at the time, just over a year out of residency. This enabled me to continue aggressively paying off my refinanced student debt and getting a nice home that met most things off our wish list. It would have been simpler having a regular mortgage that financed 90% at a ~2% fixed interest rate but now that by student loans are paid off I plan to aggressively have that credit line amount paid off within the next 3-4 months.
I used a physician loan to buy a very modest condo (139k) during residency and we stayed there until a year after I started practicing. At that point we easily qualified for a traditional mortgage on a fixer upper (an 1880 Victorian in a old city neighborhood that’s under transformation). We then proceeded to slowly renovate and paid for it by refinancing a few times over the 5 years that we worked on it.
We got lucky because we bought it for 140k when the housing market was still recovering and when the neighborhood we’re in was still in its early phases of redevelopment. Both the market and the neighborhood have drastically improved since then and with our renovations complete our house is now worth somewhere in the neighborhood of 600k and we only have a 295k mortgage. We probably put 100k cash in it as well.
Going the fixer upper route and initially buying a house well below your budget may allow you to avoid needing a “physician loan” program all together as it did in our case. Although, I understand that renovating is not for everyone.
I have my reservations about using Josh Mettle for mortgages. I bought a condo in Utah a few years back initially getting financing through him assuming as an expert in “physician mortgages” things could/would go smoothly. I was entering fellowship at the time. He pre-approved my financing for a 5/1 ARM. When it came time for signatures all the sudden the ARM was gone and all he could do was a fixed 15 or 30 year at a higher interest rate/higher monthly payment. I scrambled and fortunately found someone to do the 5/1 ARM at a better rate locally. It all worked out for me in the end but this was despite him misleading me. Just my personal anecdote, take it as you wish.
Interesting thought experiment. There are exceptions to every rule, but in most cases, I would recommend that new attendings pay off their debt rapidly, make sure their job is stable, and save up a 20% down payment before purchasing a home.
Live free M.D. Is spot on ,Couldn’t agree more. especially in this environment very few people stick in their first job out of residency. Buying a house straight out of residency is borderline insane. That being said, I did it and it still worked out, but looking back it was definitely a bad decision that we lucked into
Anyone with an OR physician mortgage? Can anyone recommend a bank in Portland OR? Looking to buy our first home! Thanks
You’ve seen this page, right?
https://www.whitecoatinvestor.com/websites-2/physician-mortgage-loans/
2 experiences to share: one my own, the other a good friend and classmate.
I am graduating from dental school in a month and my wife and I close on our first home this week. We will be moving to a rural area of Iowa about 30 minutes from a metropolitan area. I looked into Physician’s Mortgages but decided to give local banks a try first. Since I only have a contract with a guaranteed minimum one bank said no, but another said “yes!”. The local bank was great to work with and was willing to do a completely “in-house” mortgage for us. We were preapproved for 225k, but purchased at 172500 for a 4 bd 2 bath home (Pros of a rural area 🙂 ) We plan on being in the home 5-10 years. 5/1 ARM at 4.625%, no PMI, 5% down payment, AND the bank is allowing us to push out our 1st payment until June so that I only have 1 month of dual mortgage/rent on the old apartment.
In contrast, a friend of mine used a Physician Program. It worked out in the end, but he underwent a significant amount of stress to get through it. The pros of his situation are he and his wife got preapproved for a larger amount and got a bigger mortgage (or is that a con?) and despite my wife and I having a better credit score and history, they were given a lower rate of 4.25%. They also had 5% down, but still have PMI AND they had to show evidence of 6 months of mortgage payments at closing. I was surprised by this because I thought if you have the extra money for 6 months of payments, you would have the money for almost a 9% down payment in total funds, so why not just have the larger down payment? They were scrambling to come up with the extra 6 months of funds. Now, I do not know how much of their situation is typical and boilerplate protocol for this company or if some of the extra hoops were due to their own situation.
So, I guess all I can say is ask lots of questions no matter who is doing your mortgage. Make sure you understand exactly what is required of you at closing BEFORE you commit. I also realize that my situation is uncommon and probably won’t fly in places like Florida or California. But, if you have local banks, ask them. At worst they will say “Sorry, but we don’t typically do something like that.” If they don’t say it, it might be worth a look to see what they can do for you.
What kind of a “physician mortgage” requires PMI? That’s not a doctor mortgage by my definition. That’s the whole point of a doctor mortgage.
That’s kind of the point I was alluding to that some companies have caveats to their Physicians mortgages. Theirs was related to credit score: 2 points below their cutoff and he got hit with PMI.
So I have read numerous posts mentioning “live like a resident” as well as a recent post regarding buying a house straight out of residency and how not such a great idea. Although you make great points, I have signed a contract at a promising job in both my wife and my hometown and we have decided to build a house instead of rent/buy resale. We do have an exorbitant amount of student loan debt between the 2 of us (which we plan to pay of over the next 6-7 yrs) and I am sure you probably think we are idiots for building a house under these circumstances, but we do plan to otherwise live like residents and moreover, the rental market in this area is quite high as is the housing resale market in this area…Hence, our decision to build something we have say in (nothing extravagant) but will be a large purchase. During this process, I have been talking with the builder who has brought up some “unique ideas” to assist in paying off (at least part of) our student loans through our mortgage loan which he has done for other clients in the past. He hasn’t provided the details yet, but it sounds like taking out more $ for mortgage (much lower interest rate) and not using all of it on house which can then be used to pay down/off my higher interest rate student loans. Have you heard of strategies like this and what is your thoughts on the matter? Thanks as always for your great advice/recs!
There really are few absolutes in this business and the truth is a physician income can overcome lots of bad decisions. But like the liver, don’t ask it to do too much!
I think swapping student loans for mortgage loans can be a great move a lot of the time.
Hope your job works out well, that’s the main thing that would cause you to regret this decision to buy the big house right out of residency.
Hope so too, has dream job written all over it! As with all things, only time will tell. I will give the swap some more thought as it is quite a quite intriguing idea. Thanks for sharing your thoughts. PS you would have thought I was on payroll as much as I have been advertising your blog to my colleagues. Great blog, thanks for all you do!
Finishing up residency this June and looking to move back home. Original plan was to follow the advice of “living like a resident” however in the small town Im moving to, the rental market is almost nonexistent. As a result I have looked briefly into purchasing a home with the encouragement of fellow home buyers who stress that the market is anticipated to worsen for buyers over the next few years. My question is there an exception to the “live like a resident” suggestion when buying a home in a few years could mean significant cost difference? Second, would refinancing my student loans now help or hurt me in the long run if buying a home soon? Currently paying via IBR and no plans for loan forgiveness. Thank you so much dedicating so much of your time to helping us new docs out!
You don’t have to rent to “live like a resident.” But the main problem with buying while trying to live like a resident is we simply buy more house than we would have rented knowing it was temporary. We consume more of our income in housing. Who wants to be in a house long-term that you can afford as a resident?
Don’t believe anyone who says they can predict the future, by the way.
There are exceptions to everything. Most docs make enough money that they can “do one or two things wrong” and out earn their mistakes. But what I keep finding is those who are asking about exceptions have already made several “mistakes”. You can’t outearn 5 or 6 of them. For example, you can probably buy a house and you can probably make up for a below average salary and you can probably make up for higher than average student loans, but you can’t do all three and probably can’t do 2 of the 3. Remember that when you do what everyone else is doing, you end up with results like everyone else got. The “millionaire 7 years out of residency” club is small because of that reason. It isn’t that it is particularly hard or complicated to do what you need to do to get those results, but most people don’t do it because it isn’t a priority. Then when they are 10-15 years into their career they realize that financial independence matters to them a lot more than they thought it would.
Your credit score may dip temporarily when you refinance. It could also go up. Best practice is probably to get the mortgage lined up first and then refinance the student loans.
That certainly makes sense. Thank you so much for the clarification!