Doctor mortgage loans, also known as physician mortgage loans, physician home loans, or even just physician loans are being offered by more and more banks as time goes. On this page I’ll explain what you need to know about them.
Physician Mortgage Loans – Their Pluses and Minuses
The main feature of a physician mortgage loan is that a doctor can put less than 20% down and still avoid Private Mortgage Insurance (PMI), that wonderful product the borrower pays for to protect the lender from the borrower defaulting.
The advantage for the doctor is that she can buy the house sooner than she would otherwise be able to. This can be a great feature for a doctor who knows she is in a long-term professional and social situation but has a better use for her money, like paying off student loans.
The advantage for the bank is they are able to lend money to someone with a high income and very low chance of defaulting on the loan (as low as 0.2%, far lower than a typical borrower) AND, they hope, establish a long-term relationship so they doctor will come back for checking, saving, HELOCs, future mortgages, investing, insurance, and estate needs. Plus, perhaps the doctor will refer all of her doctor friends there too.
Features of a Doctor Mortgage Loan
Doctors, at least those in a rush to buy a home, have some other disadvantages that can make it difficult to secure a conventional mortgage. Besides not having a down payment, they also frequently have a high student loan burden. In addition, they may only have a contract and no actual proof of earnings (i.e. pay stubs) demonstrating the income they’ll be using to pay back the mortgage. So the three main features you will see with most physician loans are:
- No PMI despite a down payment of only 0-10%
- Special treatment for the student loans (usually that they only take required payments into consideration)
- Will close before you actually start working (i.e. accept a contract instead of paystubs as evidence of future earnings)
There are additional features and requirements that some doctor mortgage lenders may have:
- May be limited to a new resident, new attending (7-10 years out of residency or less), or dentist only (although some offer loans to veterinarians, optometrists, podiatrists, and even attorneys and many lenders will lend to a doctor at any stage of his career, or even for a second home.)
- Usually a slightly higher rate and fees than a conventional mortgage (no free lunch)
- May require the physician to open a bank account at the bank from which the mortgage is paid by auto-draft
- Is occasionally restricted from certain types of homes, such as condos, but in general can be used for any home
- Has the same rate whether loan amount is above or below “jumbo loan” limit ($417,000 in my area)
- Some programs even allow you to use gift money for a down payment, for required reserves, or for closing costs
- Require cash reserves equivalent to a few months of Principle, Interest, Taxes, and Insurance (PITI), a reasonably good credit score, and a loan payment to income ratio of less than 38% (as high as 50% with some lenders)
Who Offers Physician Mortgage Loans?
There are a number of banks and agents listed below who can assist you with a doctor’s loan. I am confident there are others out there as well. Each of these only offers loans in certain states, so there might only be one or two of these options available to you. Unfortunately, I have been unable to find a comprehensive list of which lenders are available in which states. It is also difficult for me to recommend one lender over another, as most doctors only buy one of these in their lifetime, and all those who work in the industry are obviously biased. But the selection process is made much easier by the fact that only a few lenders will likely be available in your state. More specific information from each of the lenders below about their loan product can we found in this post. (Lenders- if you would like to be listed here, contact Cindy (at) whitecoatinvestor.com.
If you’ve decided to go ahead and get one of these loans, this section ought to help you narrow down the choices. The specific persons listed here for these lenders are paid advertisers on the blog. Thank you for supporting those who support the mission of The White Coat Investor.
+Bank of Oklahoma Financial, NA: AR, CO, KS, MO, OK, TX
Contact: Bo Brown (NMLS #499414) at 816-309-5571 or [email protected]
Loan Depot: AZ, CA, HI, OR, and WA
Contact: David Henderson (NMLS#1183120) at
Laurel Road: All 50 states. Member FDIC. Equal Housing Lender. NMLS #402942
Contact: Annie Mariano (NMLS #403900) at 203-669-4134 Visit: Laurelroad.com/whitecoatmortgage
(Laurel Road’s 100% digital application is available 24-hrs per day. Laurel Road Bank offers no PMI jumbo loans with as little as 5% down up to $1.5MM. Additionally, receive up to $650 in closing cost credits. For more information on closing cost credits see https://www.laurelroad.com/mortgage#offers-and-benefits)
Click on the Fifth Third Logo to the right for the Physician Loan Specialist contact information or Contact my business manager Cindy([email protected]) for contact information by sending her an email with Fifth Third in the subject line
SoFi: AL, AZ, CA, CO, CT, DC, DE, FL, GA, ID, IL, IN, MD, MN, MT, NC, ND, NJ, NV, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WI, and WY
Contact: 844-763-4466 (NMLS #1121636)
sofi.com/whitecoatmortgage (Exclusive link that provides readers $500 welcome bonus) (Not specifically called a physician mortgage loan but offers no PMI for jumbo loans with 10% down. Does requires pay stubs rather than just a contract like most doctor loans) Disclaimer
BankMD: TX, FL
Contact: Moses Luevano (NMLS #1426259) at (855)4BankMD (422-6563) or [email protected]
Citizens Bank: CA, CT, DC, DE, IL, IN, KS, KY, LA, MA, MD, ME, MI, MO, MN, MS, NC, NH, NJ, NY, OH, OR, PA, RI, SC, TN, TX, VA, VT, WA, and WV
Contact Chris Minear (NMLS# 273313) at 330-835-2877 or [email protected]
Physician Home Loans at Fairway Independent Mortgage Corp.:
Lending in all 50 states!
AL, AK, AR, AZ, CA, CO, CT, DC, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, MA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, OH, OK, OR, PA , RI, SC, SD, TN, TX, UT, VA, VT, WA, WI, WV, WY
Contact Physician Home Loans at 385-355-2130 or [email protected]
+Bank of Oklahoma Financial, NA
Parent company to Mobank, Bank of Arkansas, Bank of Texas, & Colorado State Bank & Trust
Open an account with the BOKF family and get a .25% rate discount and $500 lender credit
*Branch Banking and Trust Company is a Member FDIC
Equal Housing Lender. Loans are subject to credit approval. © 2015 Branch Banking and Trust Company. All rights reserved
Alternatives to Doctor Mortgage Loans
What other options does a doctor have? It turns out plenty, and you can usually get most of these options from the same lenders who do physician mortgage loans.
- Conventional 20% down mortgage– Often the best choice for a mortgage as it generally offers the most options (30 year fixed, 15 year fixed, ARMs etc), the lowest fees, and the lowest rates. It does require proof of earnings and a substantial sum of money to put down. That money, of course, becomes unavailable to invest or pay down student loans.
- 80/20 and 80/10/10 loans– These disappeared from the scene after the 2008 Global Financial Crisis, but have been making more of a resurgence since. The theory is that you would get an 80% loan at a slightly higher rate than on a 20% down loan, then get a 20% loan at a much higher rate. You would avoid PMI (which sometimes isn’t tax-deductible (but has been from 2007 to 2018 for those with an income less than $110K) replacing it instead with more interest. The 80/10/10 and 80/15/5 were variations on the theme, with a downpayment required.
- Conventional mortgage with less than 20% down– These loans have higher rates and fees than a 20% down mortgage. They also require you to purchase PMI. It is rare for you to find one that is 0% down (in fact the best you can find since 2014 is 3% down for a first time homebuyer program through Fannie Mae or Freddie Mac), but 5% and 10% down are common.
- FHA Loan– This loan has higher rates and fees than a 20% down loan (notably a 1.75% up-front mortgage insurance premium financed on top of the principal loan amount.) “funding” fee), a 3.5% required downpayment, and, since 2012, requires a monthly mortgage insurance premium (0.8-0.85% of the loan balance annually) for the life of the loan. FHA requires the lender to use the credit report amount of the student loan payment, or if none listed, 1% of the outstanding balance unless the borrower can provide documentation that the loan is in deferral. This makes this loan tricky for indebted residents to qualify for. The rates are generally, however, slightly lower than a doctor loan, but may not be when you add in the PMI costs.
- VA Loan– This loan requires that you qualify for VA benefits, which disqualifies many. It is an improvement on the FHA loan in that there is no downpayment nor mortgage insurance requirement. Rates are similar to FHA rates, but the funding fee is higher- 2.15% for first-time borrowers and 3.3% for subsequent use. That fee may be waived if you have a military disability rating.
How Do Rates and Fees Compare?
The doctor’s loan rate generally has the highest rate of all these options. But the down payment is the smallest. The fees are where things get really blurry and hard to compare. On the one hand, the FHA and a conventional loan with less than 20% down require mortgage insurance, which unlike loan interest, is not tax-deductible for those with incomes over the phaseout range of $100-109K. It is often hard to tell if you’re better off paying mortgage insurance or a higher rate/fees. It is much easier to get rid of origination/funding fees by putting 20% down. Most other loans, including the doctor’s loan, will hit you with these fees. (Although at least one doctor’s loan will waive this if you’re willing to pay a higher interest rate.)
A doctor’s loan rate is typically about 1/4% higher than a comparable FHA/VA loan but could be anywhere from 1/8% to 1% higher than a conventional loan. That difference can really add up over time. Plus, you don’t have to pay the extra fees up front, and that money compounded over 30 days also adds up to tens of thousands of dollars. The benefit of using a regular old 30 year fixed loan with 20% down could be as much as $235,000 on a $500,000 home. This, of course, ignores the opportunity cost of that $100,000 down payment, which we’ll discuss below.
Should I Get a Doctor’s Loan?
There is a lot that goes into this question. It is my opinion that most residents and fellows should rent instead of buy for several reasons.
First, you’ll probably only be in that location for 1-5 years. It usually takes at least 5 years to break even on a home, obviously more if a real estate bubble bursts on you. The best resource to see how long it will take to break even in your particular circumstances is the New York Times Buy vs Rent Calculator. Even if you decide to stay in the same area as an attending, I’ve found that attendings don’t usually like to live in their “resident home” for long once their income quadruples.
Second, a resident/fellow doesn’t make very much money and so usually takes the standard deduction on their taxes (now $12,000 single and $24,000 married for 2018). That means your mortgage interest is probably NOT deductible. Even if you itemize, most of your interest probably isn’t going to be deductible. That increases the effective cost of your shelter.
Third, homes require maintenance (expect 1-2% of the value of the home per year), which requires time and money, neither of which are abundant to a resident.
Fourth, there is a lot of hassle and expense involved with buying and selling a home. Renting a home is quick and easy by comparison. If you’ve ever tried to sell a home in a down market you know how tough it can be to sell it at any price, much less a reasonable one. Plus, there is a great deal of flexibility with renting. If you don’t like the neighborhood, you just move. At worst, you’re in for a one year contract. No big deal. New attendings, on the other hand, are much more likely to stay put and the interest is much more likely to be fully or nearly-fully deductible. The buy/rent ratio sways heavily toward buying for most.
If you’ve decided to buy a home, you should give serious consideration to putting 20% down and getting a conventional mortgage. The improved monthly cash flow will allow you a great deal of financial freedom and ability to invest (and even spend.) You’ll save hundreds of thousands on interest over the life of the loan, all guaranteed, unlike investing a potential down payment elsewhere. But if, for whatever reason, you’re going to buy a home AND you can’t or don’t want to put 20% down, then a doctor’s loan is a reasonable option and at least as good as the other non-20%-down options.
Isn’t it Better to Get as Big a Loan as Possible and Invest the Difference?
When you run the numbers, you can easily see you’ll be better off borrowing as much money as possible and investing it at a higher interest rate. This is the benefit of leverage. Consider a hypothetical $500K home. You could save $235,000 using a 20% down conventional loan over the doctor’s loan. But if you invested that $100K downpayment at 8% over 30 years, you’d end up with over $1 Million. The terms of this “margin investing” are favorable, in that you have a lot of time for the market to rebound and there are no margin calls on mortgages. Unfortunately, there are a few reasons why you probably don’t want to do this:
1) Getting a lower interest rate on the mortgage is risk-free. That $235,000 is guaranteed. The $1 Million is not guaranteed. If there is anything the stock market has taught us over the last decade, it is that there are no guarantees. Risk of loss is very real. If you get 2% returns over the 30 years instead of 8%, you’d have been far better off with the lower rate mortgage.
2) Being underwater on a mortgage is no fun. Putting 0% down means you are immediately underwater since it generally costs 6-10% of the value of the home to sell it. If you think it is hard to sell a home in a down market, try doing it when your only options are a short sale, coming up with tens of thousands in cash, and letting the bank foreclose and ruining your credit.
3) Behavior. It is much easier to spend money than to invest it. To come out ahead you have to actually invest and keep investing that $100K for 30 years. Taxes and investment expenses, of course, can also reduce the rate of return on that money if you have poor investor behavior.
4) Cash flow and investing the difference. Putting 20% down lowers your mortgage payment dramatically. Again taking that $500,000 home example. With 20% down, your monthly principle and interest payment is $2027. With the doctor’s loan, it is $2800. That $800 a month can really make a difference in your budgeting-giving you more spending and savings options as they become available. You can even use that $800 a month to pay down the mortgage by getting a 15 year fixed mortgage instead. That would lower your interest rate another 3/4%, saving you even more over the years and allowing for earlier retirement. Alternatively, you could just invest the $800 each month. At that same 8% rate of return, after 30 years you would have $1.2 Million, even more than the $1 Million that $100K down payment would grow to. So overall, if you invested the difference after 30 years of 8% annual returns, you’d come out over $400,000 ahead by putting 20% down. But, of course, you still have to come up with the 20% to put down, which isn’t easy.
Need a Realtor or Relocating?
If you are in need of a realtor the White Coat Investor is partnering with CurbsideRealEstate.com, a free real estate concierge service for physicians, by physicians. After struggling through his first home purchase, Dr. Peter Kim founded Curbside Real Estate to address physician-specific issues encountered during the home buying process. In addition to providing news and information, CurbsideRealEstate.com is your physician-led “curbside consult” for physician home loans, expert real estate agents, relocation, and everything in between. Whether you’re securing your first home loan, just beginning your home search, or you’re not sure where to start, CurbsideRealEstate.com can help you navigate the home buying process confidently and efficiently, saving you valuable time and money.
Exclusive bonus for White Coat Investor readers: $100 bonus at closing.
Lenders- if you would like to purchase advertising space on this page, email Cindy (at) whitecoatinvestor.com.