A home is a major investment, and unless you have hundreds of thousands of dollars socked away, you’ll likely need to get a mortgage if you want to buy one. Many doctors are in very different financial situations from most people looking to buy a home. Large amounts of medical school debt can make it hard to get a conventional loan, even if physicians’ correspondingly high incomes mean they can afford the debt.
Many lenders offer specialized physician mortgage loans to help doctors purchase a house. Other physicians might want to consider a conventional loan. Here's what white coat investors who are looking to procure a mortgage should know when thinking about a physician loan vs. a conventional loan.
What Is a Physician Loan?
A physician loan is a special type of loan designed for the unique needs of doctors. Doctors traditionally earn a high income or expect to earn a high income in the near future, but they can sometimes find themselves with no cash, little credit, and high debt—especially if they've just graduated from medical school or just finished with residency. Or, perhaps they're still in school with no current source of income.
Typical lenders want their borrowers to be gainfully employed, to have strong credit, and to have the ability to make a down payment if they want to buy a home, effectively the opposite of where many young doctors find themselves.
Physician mortgages work similarly to conventional loans with some key differences. For example, you can qualify with a down payment of less than 20% and still avoid having to pay Private Mortgage Insurance (PMI).
Lenders also use slightly different underwriting criteria, focusing more on how much you have to pay on your loans each month instead of their overall balance and by accepting a signed employment offer as proof of income. This makes it easier for doctors to qualify for loans straight out of medical school or residency. Each bank sets its own rules and conditions for physician loans, so you should take the time to shop around and compare offers.
What Are the Benefits of a Doctor Mortgage?
The primary benefit of a doctor mortgage is that it gives you the opportunity to qualify for a loan to which you normally wouldn't have access.
To get a conventional mortgage, you need strong credit, proven income in the form of paystubs, low debt, and money for a down payment.
A doctor mortgage lets you skip all of those steps. You can qualify for a loan without needing a down payment, you can qualify while having a large student loan balance, and you can qualify even if you haven’t gotten your first paycheck yet.
Typically, home buyers with less than stellar credit or minimal cash for a down payment pay the price in the form of private mortgage insurance (PMI)—which is insurance that you pay for to protect the lender against you defaulting on the loan—or highly elevated interest rates. Doctor mortgages don’t include PMI, which is good since PMI does nothing for you and is simply an expense. Even better, the interest rate for a physician mortgage typically isn’t much higher than a conventional loan for someone with good credit.
How Are Physician Loans Different from Conventional Loans?
Lenders designed physician loans to differ in a few key ways from conventional mortgages:
Are Physicians Loans a Good Idea?
Now that you know what a physician loan is, you’ll have to decide whether it’s the right choice for you.
Physician loans do have their place. Doctors are in an incredibly unique financial position compared to most people, and physician loans acknowledge that. However, just because you can get a physician loan doesn’t mean it’s a good idea.
If you’re getting a physician loan, you have to ask yourself whether you’re buying a home just because you can, not because you should.
If you’re a resident, there’s a good chance you’ll only be living in that area for a few years. It can take years to break even on buying a home compared to renting, so getting a loan (and then buying a house) might not be the best choice.
Physician loans are good because of their minimal down payments, but remember, owning a home comes with its own cash requirements. If the water heater breaks or if you need to replace the roof, repairs can easily run thousands of dollars. If you don’t have the cash on hand to make needed repairs, you could wind up with credit card debt or living in a less-than-comfortable situation.
The high loan amounts offered through physician loans can also tempt you into buying more home than you can really afford.
All of that isn’t to say that physician mortgages can’t be a good idea. If you know you plan to stay in one place for the long term, you have some savings but not enough for a large down payment, and you buy a properly sized and properly priced home, physician mortgages can help you become a homeowner much sooner than would otherwise be possible. Then you can use the money you would have used for a big down payment for something else, like paying off student loans or maxing out retirement accounts.
How to Decide Which Type of Home Loan to Choose?
If you’ve decided that buying a home is the right choice for you, you’ll have to decide whether to pursue traditional lending or a doctor mortgage.
Physician loans do have lots of advantages, but those primarily revolve around easier underwriting requirements. A doctor mortgage can help you qualify for a loan you otherwise couldn't get.
Conventional mortgages are more difficult to qualify for, but there’s a reason for that. If you can qualify for a conventional mortgage, especially if you can make a sufficient down payment to avoid paying PMI, you’ll usually get a lower interest rate and fees. That means a lower monthly payment and a lower overall cost for your loan.
If you strongly believe that buying a home is the right financial decision and you can’t qualify for a conventional loan or simply have a better use for those limited funds, then a physician loan is a good choice. However, if you have strong credit and the savings to make a down payment, a conventional mortgage is likely the better choice. Even if you can’t afford a full 20% down payment, you could avoid PMI in other ways, such as through an 80/10/10 loan, which involves a 10% down payment and two separate loans.
Physician loans give doctors a way to qualify for mortgages despite their high student loan debt and lack of income history. If you’re dedicated to the idea of homeownership and feel that it’s right for your situation, a doctor mortgage will let you buy a home sooner than would otherwise be possible.
However, for many doctors, especially those completing a residency or fellowship, buying a home isn’t the right decision. In that case, you’ll be better off waiting until you know you’ll live in the same area for a while, at which point you’ll likely qualify for cheaper, conventional loans.
Have more questions about whether a physician or a conventional mortgage is right for you? Let us introduce you to the best mortgage lenders in the business, vetted by WCI and thousands of readers.
Have you had to decide between a physician loan and a conventional loan? What did you do and why? Did it end up being the right choice? Comment below!