[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
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!