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.
#6 Credit
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.
#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:
Special thanks to both our content manager Jill and to long-time blog sponsor Josh Mettle for their assistance with this post.
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!
To point #5 above (higher interest rates): when I read the last version of this article that paragraph lead me to get multiple quotes from different banks for MD vs. non MD but that was a silly question; MD loans were always the best rate. I found last year the zero down MD loans had a higher rate than the 5%, but putting more than 5% down didn’t change the rate (at least with Suntrust). And putting 5% down or more on an MD loan was the best rate available period. When doing an “MD” category loan you can pick your down payment 0+ and the rate might change accordingly, but overall qualifying for an MD loan will likely get you the best rate for any given down payment level vs. any other loan type. So I found the wording of that paragraph misleading (it assumes MD loan = zero down payment), and the last sentence is likely not true or misleading; applying under an MD loan will likely get you a better (or at least identical perhaps in some cases) rate vs. conventional. So just forget conventional altogether; always apply under an MD loan then price out rates for different down payment levels. The rate I got was lower than any conventional rate @ 5% down plus.
I priced several MD loans and for me Suntrust was the lowest. Also their application system is great; you can link accounts like with Mint or Personal Capital so you don’t have to put each account’s data in one by one. In the end I went with a 7/1 ARM on a high $400K single family home with 10% down for 3.125% in Q4 2019 no points, $995 application fee (plus all the usual fees- appraisal, inspection, settlement, etc.). The same conventional 7/1 loan with 20% (double) down was 3.49%. A final comparison 30yr fixed- conventional 20% down was 3.75%; same terms MD loan was 3.675%.
So would you still say the MD loan came with a higher interest rate and higher fees? I wouldn’t. Now it’s true the MD loan 30yr fixed zero down had the highest rate overall (3.975%), but there’s no conventional loan to compare to, just the 20% down at 3.75% but that’s apples to oranges. But sure, putting zero down is a higher interest rate than putting something down.
So in all, the MD loan won every time over conventional. Plus being able to put just 5% down to get the best possible rate! I get what you’re trying to say: zero down = higher rate, but that’s completely different from whether you should use an “MD loan” regardless of down payment level. You absolutely should!
“So I found the wording of that paragraph misleading (it assumes MD loan = zero down payment)”
While you are correct, the physician loan is fairly highly associated with zero down payment, even if that isnt necessarily a criteria of the loan. The whole concept was developed around a professional with high potential but no current access to the cash you would need for a traditional mortgage.
You may get the best deal applying through a physician loan with 10-20% down, but many docs (specifically the ones the banks had in mind when making the program) have nothing but a pile of loans.
You could argue that they should be waiting until they have more than said pile of loans(agreed!), but the fact remains that the majority of people taking the loan are in the MD loan = zero down payment
I don’t disagree with that, my first MD loan was no money down. Still, this article isn’t just for residents or new grads, it’s about MD loan programs in general. Being several years out of training now and in a very flexible financial situation I would read that paragraph and think oh…well, I can do 20% down and don’t want banks to take advantage of me on interest rates so I’ll just apply for a conventional loan. Which would have been a mistake; my interest rate would have been higher.
I just think it’s worth making the distinction between MD loan programs in general (great rates), and zero down MD loans within them (higher rates but better than conventional 20% down loans if you just put as little as 5% down in some cases).
MD loans aren’t just higher interest freebie handouts for loan strapped residents. I found the loan I chose to be a genuinely premium class loan that got me a lower interest rate than any other option with no catches.
In my experience, and that of the lenders who do these all day, that situation is actually fairly unusual. You usually end up paying a little more in rate to get a doctor loan. Glad it worked out well for you, but 10% is on the high end for a down payment for a doc loan. Maybe that’s how you ended up with a lower rate, dunno. But the point stands…it’s worth looking around and if both loans are an option, looking at both loans.
I just got a 3.0% interest rate on a 7/1 ARM on a physician loan. Lowest I got quoted with conventional was 3.25%.
A local banker here told me he loves these things because docs have the lowest default rate. We can always moonlight another shift, and have a sense of responsibility that many don’t have. We are resilient. Unfortunately all too often I see a doc buy a 1.2 million dollar house with one of these loans when he or she should not do so. The doc becomes the slave to the lender. The bank doesn’t care if you have no money to eat out or get stressed about having to work another shift. The bank savors the security of the physician job and work ethic. All the more reason to “live like a resident” so that down the road you won’t have to “work like a resident.”
I’ve done three different physician mortgage loans for three different states I’ve lived in. Highly recommend. One suggestion I have may be obvious. To those of us a few years into practice, make sure you occasionally keep looking at refinance rates after you have enough for 20% equity since the rates are better. I had a physician loan at 3.8% for 30 year term. I built up some equity and just refinanced into a 15 year conventional loan for 3.0%.
That map is pure gold if someone is looking for a list of lenders.
One lending issue that was a contributing factor in home loans related to appraisals and the LTV ratio.
Are preapprovals available?
What role does the appraisal play ?
Are appraisals handled the same on conventional vs
Doctor loans?
There is an interplay between the security of the real estate and the physicians income as a borrower.
Preapproved for $750k but only $500k on that house would be an extreme example.
Yes,
Same role.
Yes.
Sharing my recent experience in case it helps others: My husband (medical resident, PSTP) and I (academic in a professional field) recently purchased a home and were surprised by the MD loan process. I recognize our situation is a bit different than many residents or even docs. Because we both took academic pathways, we have employment histories as well as current jobs, excellent credit, and almost no debt. We were originally attracted to doc loans for the option of a low down payment, since we are still early career. However, given our circumstances, doc loans were far less attractive than conventional loans. Many doc loans were only offering ARMs, which we didn’t prefer given the fixed rates at the time. The few fixed rate doc loans had substantially higher interest rates and required cash reserves. Further, and much to our surprise, PMI rates for conventional loans can be extremely low, so PMI became far less important than interest rate. Finally, the lack of a cash reserve requirement in the conventional loan meant that we could actually roll more cash into our down payment. Echoing others here, I encourage people to shop around. Educated professionals in stable industries are bankers’ dreams.
I agree. What’s up with requiring a cash reserve? If I had cash, I’d use it for a down payment. The reason I don’t have cash is that I have a better use for it (student loans, retirement accounts etc)
Good article but one major oversight is the failure to consider government loans. Both VA [if eligible] and USDA [if area allows] offer 100% financing at better rates. FHA allows @97% loans; even with m.i. FHA is currently better than conventional, especially if LTV is >80%. So look first to see if you can qualify under one of the gov’t programs before settling for a doc loan.
Interesting that is your experience. In my experience, FHA and VA loans are not competitive at all if you can qualify for anything else. But based on comments on this post, everything is apparently constantly in flux so who knows what will be best on any given day.
That was true 12 years ago. everything changed after 2008/9. Today VA 30 is at 2.75%, less than one point cost. FHA same, but ad 1/2% m.i. Comparable FNMA/FHLMC is 3.25%; so even FHA is better than FNMA above 80% LTV.
Love love your content and your great sense of humour. Thank you. Is it worth mentioning that borrowers get loans and lenders get mortgages or is that too into the weeds for doctors? A small request for lawyers everywhere. Have a magic day and keep on fighting the good fight.
Interesting. While perhaps legally and technically correct, I think most of those who owe money to a bank from a loan used to buy their home call their loan a mortgage. I doubt that one is going away any time soon.
NO SOUP FOR YOU!