In mid-March when medical school seniors were matched with residency programs that would determine where they’d live for the next three to five years, mortgage lenders were seeing an uptick in visits from the future doctors of America.
Along with seeing the advantages of buying over renting a home, some are interested in getting a “physician loan” that may offer them slightly better terms than a conventional loan.
Among the benefits of a physician loan are that it has less stringent credit and debt-to-income requirements, has a high maximum loan amount, can have zero down payment requirements, and doesn’t require private mortgage insurance, excellent credit or a long job history.
“Despite their student loan debt, medical residents and physicians are considering owning a home versus renting because a monthly payment for a home might be a better alternative to rising rental rates,” says Bob Donovan, divisional sales executive at Bank of America.
“These future physicians recognize that owning a home gives them a chance to begin building equity as they pay down their home’s principal and home values rise over time,” says Donovan.
Roughly 80 percent of the doctors and residents that Bank of America talks with about mortgage options choose a doctor loan over conforming options because of its flexible features, he says.
High debt and income for doctors
Medical school graduates and recent doctors can be in a precarious situation. Saddled with an average debt of $191,200 — the highest among college graduates — medical professionals have the highest debt-to-income immediately after graduation, according to an April story by Priceonomics.com.
Normally, such high debt can make it difficult to qualify for a mortgage, especially for a large and expensive home. Physician loans can help doctors buy their first home with the expectation that their salary will increase. The median salary for a physician in 2015 was $187,200 per year, according to the Bureau of Labor Statistics.
“A lot of times they have massive student debt,” but doctors are a better loan risk than other professionals because of their future income potential, says Jason Skinrood, a loan officer at Supreme Lending in Salt Lake City, Utah, whose company offers physician loans.
Benefits of physician loans
While terms vary by lender, here are some of the main benefits of physician loans:
A break on student debt:
On a physician loan, deferred student debt isn't counted toward the borrower's debt-to-income ratio. The debt must be deferred for at least a year.
With deferred student debt excluded, physician loans typically allow a maximum debt-to-income ratio of 40 percent, according to Jason Lerner, vice president and area development manager at George Mason Mortgage in Ellicott City, MD. That's compared to a ratio of 43 percent for all debts that's typical for a conventional mortgage.
No employment history needed:
Conventional loans require two years of income history, but a physician loan only requires proof of current employment, Skinrood says. This can be done with a pay stub, though verbal verification with a hospital’s Human Resources department, for example, will be needed, he says.
The point is to show proof of future income in a profession where people starting their careers typically have less reserves and liquid assets but have good credit scores and earning potential, Lerner says.
“Even if they don’t have a lot of income initially, they’ll have more later,” he says.
Since cash can be tight for medical school graduates and doctors early in their careers, the physician loan helps by requiring either no money down or 10 percent down or less, depending on the loan program. Skinrood says he’s seen physician loans with typical down payments of 3 percent, while Lerner says zero down is common.
No private mortgage insurance:
One aspect of a physician loan that can help doctors have more of a down payment is the fact that it doesn’t require private mortgage insurance, or PMI. Conventional mortgages require a 20 percent down payment to avoid PMI.
Higher credit score may be needed:
While an excellent credit score isn’t needed to qualify for a physician loan, many will need a slightly higher credit score than they would with a conventional loan. A score of around 680 will be needed to compensate for the smaller down payment, Skinrood says.
Higher loan amounts:
The maximum loan amount that Skinrood’s firm offers for physician loans is $650,000, which is well above the conforming loan limit of $424,100, he says. Lerner says his company offers physician loans for up to $1 million.
Interest rates on physician loans are a little bit more attractive than other types of loans, Lerner says, though mostly on homes for $400,000 or more.
Fixed-rate and adjustable-rate loans are available, though ARMS are more common because they’re cheaper and are best if a doctor is moving within 10 years, Lerner says.
For doctors only
The main requirement of a physician loan is that the applicant have a medical license. These include medical residents, medical doctors, dentists, optometrists and pediatricians. The loans often require graduating from medical school within the past three years.
Vets, nurses, EMTs, chiropractors, first responders and other high-paying professionals aren’t allowed to get a physician loan, Skinrood says.
Lerner says his company offers similar loans to lawyers, but he doesn’t know of other lenders that assist lawyers in this way.
For lenders, helping people with high income potential early in their career is a smart move.
“They’re potentially a high earner who will turn into a long-term customer,” Lerner says.