We're coming up on that time of year again when people start thinking about buying homes and taking out mortgages to do so. A frequent question we get around here is “How can I get someone to loan me money to buy a home right now?” I sometimes wish the question being asked was a little more sophisticated, such as:
- Should I buy a home at all? (Buy a home when your personal and professional life is stable) or
- Should I use a doctor mortgage or a conventional mortgage? (Depends on the alternative uses for your money)
but such is life.
Speaking of doctor mortgages, it has been a long time since we wrote about them on the blog, so we thought we'd do a round-up post today to see what's new with this product that is frequently used by white coat investors.
What is a Physician Mortgage Loan?
A physician or “doctor” mortgage is a special loan program a lender puts in place to attract high-income clients by allowing health care professionals such as doctors and dentists to secure a mortgage with fewer restrictions than a conventional mortgage.
Common restrictions doctors run into are:
- no cash
- no job
- no credit
- terrible debt to income ratio
Amazingly, some doctors think banks should lend them money just for being doctors. Well, you don't get a pass on math, but there are quite a few institutions that recognize that the financial lives of doctors are a little bit unique, that they aren't as bad a credit risk as the numbers would suggest, and that they can bring other valuable business to the bank.
9 Things to Know About a Physician Mortgage Loan
There are lots of advantages (and a few disadvantages) to a doctor mortgage loan. Let's get into them.
#1 Avoid Private Mortgage Insurance (PMI)
One of the most appealing features of a physician mortgage loan is you don't have to pay Private Mortgage Insurance (PMI). PMI is insurance that protects a lender if you stop making your mortgage payments and is required on conventional loans with a down payment of less than 20%. PMI is charged monthly and is tacked on as an additional charge to your mortgage payment until your debt is < 80% of the original value of the home (although you can ask for it to be removed sooner and they will often do it if your loan to value ratio is < 78% or so.
# 2 Financing
Financing on physician mortgage loans ranges from 90-100% depending on property location, credit score, and loan amount. Typically you can expect to be loaned 95-100% up to a $1 M loan amount and up to 90% for $2 M. Here's what some of our WCI lenders had to say about financing:
- Josh Mettle of Fairway Independent Mortgage: We have multiple physician and medical professional home loan programs to fit the needs of virtually anyone. If you have been turned down by another lender, don’t give up! We’d love to hear your story and try to build a solution for you.
- Darick Hensel of Chemical Bank: We can finance 100% up to $1 M, 95% $1 M-1.5 M. We offer 10/1, 7/1, 5/1 ARMS, and a 15yr fixed.
- Nicole Smith of Flagstar Bank: We can finance as low as 0% down payment up to $850,000, 5% down up to $1 M, and 10% down up to $1.5 M on a primary residence (single-family, townhome, or warrantable condo).
- David Edmondson of TD Bank: We have 0% down financing up to $750k. 5% Down up to $1.3 M. 10% Down up to $2 M.
- Christopher Minear of Citizens Bank: 5% Down available to $1 M purchase price and 10% down payment above a $1 M purchase price. Fixed rates from 30 to 10 years in length and 3 to 10-year ARMs.
- Tony Umholtz of Iberia Bank: We can do up to 100% financing up to $750,000. We have a 5/1, and 7/1 ARM available as well as a 30 year fixed rate.
- Tony Lupescu of Fifth Third Bank: $0 Down up to a $750,000 loan amount, 5% down up to a $1 M loan amount, and 15% down up to a $1.5 M loan amount.
#3 Student Loans
Student loans that are in Income Dependent Repayment programs (IBR, PAYE, REPAYE, etc) get special treatment under physician mortgage loan programs — even if you have hundreds of thousands of dollars in student loan debt, you can still buy a house.
Josh Mettle of Fairway Mortgage explains:
The mortgage underwriter will allow the lower income-driven repayment, as opposed to defaulting to a fully amortizing payment (as in a conventional loan). Also excluded is any student loan that is deferred for at least 12 months from the date of closing.
#4 No Pay Stubs Required
You don’t have to wait until you begin employment to qualify for a mortgage loan. A contract in hand will be enough. Typically, lenders can close on your loan if you are 30-90 days before beginning employment.
Be aware that while it is possible to get a mortgage with a 1099 contract in hand, the hoops are harder to jump through. Expect difficulties. This is one of our most frequent complaints from readers about these loans. The hospital contract needs to guarantee a certain amount of income/shifts for example in order to pass muster with most lenders.
#5 Interest Rate and Fees
There is a price to be paid to use a doctor loan. That usually comes in the form of a higher interest rate (typically 0.125% to 0.25% higher than a conventional mortgage) and higher fees. When you use a conventional mortgage, there is a lot more competition and that tends to drive prices down. Thus, if you don't have a better use for your limited cash (max out retirement accounts, pay off student loans, etc) then consider saving up a 20% down payment and using a conventional mortgage.
You'll need to maintain good credit in the 720-740 FICO score range. However, under certain conditions, some will lend with a lower credit score. For example, Chemical Bank's Darick Hensel can lend down to a 680 credit score if you have six months of cash reserves.
Frankly, if you have a credit score below 720, you probably aren't ready to be buying a house anyway. Pay off your credit cards (but don't close them), don't miss any payments, and don't borrow any more money and you should have a score over 720 soon. It's not the end of the world to rent for a year (and it is often a very good idea if going to a new area or a new job) and that is long enough to clean up your credit most of the time.
Frankly, if you have a credit score below 720, you probably aren't ready to be buying a house anyway. Pay off your credit cards (but don't close them), don't miss any payments, and don't borrow any more money and you should have a score over 720 soon.
#7 Cash Reserves
Physician mortgages often have a cash reserve requirement of 3-6 months, meaning 3-6 months of your mortgage payment. While more than many conventional loans require, it really isn't a lot of money. A 3-month emergency fund should more than cover 6 months of mortgage cash reserves. If you don't have that, again, it's not the end of the world to rent for a bit.
#8 Gifted Down Payment
Most banks will allow gifted money for any down payment but some require 5% of the down payment to be from your own funds. I always get a kick out of this requirement. They like to look at 3 months of bank statements and ask “Where did this money come from?” and “Where did this check come from?” etc.
The bottom line is if you are going to use a gift for a down payment, get it in that account at least 3 months early. Or have the person giving you the gift put your name on their account. Either way, not a hard requirement to get around so I'm not surprised that many banks have quit trying to stop it.
Here's a summary of the physician mortgage compared to a conventional:
#9 Which Professionals Qualify?
Any physician or dentist is eligible for these loans and many lenders further extend their programs to other health care and high-income professionals. Here are a few examples of professionals some of our lenders can provide a “doctor loan” to:
- Fifth Third Bank: Our programs require the applicant to be a licensed MD, DO, DPM, DDS, or DMD.
- Iberia Bank: Our Doctor loan includes: MD’s, DO’s, Dentists, Optometrists, and Veterinarians. We also have a professional loan that includes: Attorneys, CPA’s, MD’s, DO’s, Dentists, Optometrists, Pharmacists, Veterinarians, Residents, and Fellows.
- Citizens Bank: All medical doctors and dentists qualify.
- TD Bank: Physicians, surgeons, and dentists qualify.
- Chemical Bank: We allow the following for our program: MD, DO, DDS, DPM, DC, or DVM.
- Flagstar Bank: Qualified professionals include: Medical Residents (Educational License), MDs, DDS, DMD, OD, Doctor of Ophthalmology (MD), Doctor of Pharmacy, DPM, DO, Physician’s Assistant, Registered Nurse, CPA, Attorney, Nurse Anesthetist, Nurse Practitioner, Clinical Nurse Specialist, ATP Pilots, DVMs.
- Fairway Independent Mortgage: We have programs for physicians, CRNA, DPT, PA, OD, DMD, DVM, and other medical professionals.
If you think a doctor mortgage is right for your situation, thank you for supporting those who support us:
What do you think? Are you buying a home this year? Will you be using a doctor mortgage? Why or why not? Who did you use? How was your experience? Comment below!