Once you have decided that the only way forward to make that dream home purchase…
The amount of time and effort one puts in to become a doctor is no minor achievement.
In the U.S., it can take between ten to fifteen years before someone can practice as a fully licensed physician. And while the average salary at the end of that road is something to look forward to, many doctors end up burdened by student loans and other debt by the time they leave medical school. Meanwhile, their peers who went down the non-medical path are already starting to enjoy the fruit of their early investments.
So what happens when you are finally a doctor but have no savings, still saddled with your student loan but in need of financing to settle down?
Today, we’re going to discuss special loan programs targeted towards medical professionals. It’s time to learn that there are options available for you! If you are a physician or doctor-in-training, in this article, you can learn about doctor loans and how these can help you get closer to fulfilling your American Dream.
How Mortgages Work
Before we talk about physician home loans, it’s important to understand how mortgages work in general. What are mortgages, and why do people need them?
In basic terms, mortgages are home loans you apply for either of the two reasons: you either do not have the cash to make full payment on a house purchase or need the liquidity and convenience of putting your house up collateral. Not that it is in any way convenient to take chances on your home, but if you do somehow default on your mortgage, this is exactly what’s going to happen. The lender will have the right to foreclose your house so that they can recoup their losses.
When you apply for a mortgage, lenders will look at your financial background, credit score, debt to income ratio, and past behavior as a borrower. If this sounds worrying, think about how you yourself would go about deciding whether to loan funds to someone you don’t know.
Depending on the types of loans you are looking at, you might get 100% financing from mortgage lenders, or you might need to make a down payment to get approval. Whichever home loan you will get, this means that you will be paying a monthly mortgage for years to come, which will be your loan amount divided by the number of months in the loan term, plus the interest approved through your profile. There are also closing costs, origination fees, and other expenses on top of your loan amount. This is the part that might put you off, but when you keep in mind that loans are still financial products that offer opportunities, the fees can more than makeup for the convenience they bring into your life.
Considering that you will eventually be paying more money than your real estate was originally worth, it might seem like a good idea to pay in cash instead of taking on a mortgage. But for many people, this is not the reality. Making a full cash payment will mean locking up funds in real estate, and you can never really tell when an emergency will happen further down the road. The decision will be based on your particular circumstances.
Some Mortgage Loan Types
No two houses look absolutely the same inside or out. To cater to many different borrowers’ profiles, there are many types of mortgage loans available. Let’s look at a few of them.
When you have a stellar credit score and a tidy amount of savings, the best option would be to go for a conventional mortgage, a kind of mortgage underwritten by a private bank or credit union. This loan type can offer a higher interest rate than offered by its opposite, but the bottom line costs often end up cheaper. However, to qualify for a mortgage from a private lender, you will need a credit score of 620 or better, and the lower the interest rate you are aiming for, the higher your credit score will need to be.
Most first-time home buyers go for an FHA loan, a type of mortgage offered by the Department of Housing and Urban Development. This is often preferred when you have limited savings and need a low down payment on a poor credit score.
For military service members and their families, a VA loan can be availed from the Department of Veterans Affairs that doesn’t require any down payment. Last year, this loan type got an incredible boost in popularity due to the Blue Water Navy Vietnam Veterans Act of 2019, which removed previously set loan limits.
As physicians, many are not eligible for government-backed loans like VA loans. And while FHA loans are relatively easier to qualify for, you can still borrow a maximum loan amount.
Physician Mortgage Loan
It is probably unknown that there are special bank products and services offered to medical doctors. Physician mortgage loans are one of them.
Unlike the typical conventional loan, a physician loan has more relaxed requirements owing to the expectation of lenders as to the salary trajectory of medical professionals. In many ways, a physician mortgage loan (sometimes called “doctor mortgage”) can look a lot like a conventional loan with many benefits often exclusively offered by government-backed home loans.
Since a physician loan is one that’s only offered to individuals who’ve embarked on a medical career, it can ask for a more demanding resume than other mortgage loans. It would help if you had an M.D. or a D.O. to your name, although lenders who extend the doctor loan program to medical professionals with degrees such as D.D.S., D.M.D, D.P.M., and D.V.M.
With advantages like skipping making a down payment or paying for private mortgage insurance, a physician loan can feel like a well-earned benefit for the job.
Private Mortgage Insurance (PMI)
Doctors have great potential to earn a good income, so while they may arrive at their working lives with high debt-to-income ratios, lenders feel confident enough not to rely on private mortgage insurance. You are usually required to pay PMI with a less than 20% down payment with conventional mortgages. This protects the bank in case you eventually stop making monthly payments on your mortgage.
Although not all physician mortgage loans can offer complete financing with zero down payment, the alternatives are flexible down payment options. And if these benefits are sounding more and more attractive to you, it’s time to find out the minimum requirements you’ll need to apply for one.
Doctors fresh out of medical school might still have a long period of training to look forward to, and this is something that banks that offer physician loans understand. Many applications can be satisfied with a simple employment contract even if doctors have not yet begun their residencies. For self-employed physicians, the good news is that lenders are open to giving physician mortgage loans to even those with less than two years of working experience.
Another important thing to note before applying for a physician mortgage loan is that you can only use it to purchase a primary residence. Meaning, this is not an option for a separate vacation home. Many physician loans for condominiums are also often rejected.
At this point, you might be thinking, “What’s the catch?” All these advantages must still mean earnings for physician loan lenders.
The usual reason why some medical professionals would still opt for other mortgage products over doctor mortgage loans would be due to the higher interest offered. Lenders can be willing to forgo down payment and even PMI due to the physician earning potential, but for the same reason, they can also impose a more expensive interest than others.
There’s also a great difference between a fixed rate and an adjustable-rate mortgage which can make or break your decision. When we say fixed rate, this means that the interest you will pay monthly will be the same throughout your loan. Whether the economy contracts or expands or if the Federal Reserve decides to raise interest rates, the interest will remain unchanged. The opposite of a fixed rate, which is a variable rate, will instead rely on the adjusting index to determine the total mortgage payment billed to you regularly, something that many borrowers will not appreciate during a period of rising interest rates. The good news is, many banks are willing to mortgage loan a physician, and it will still be your prerogative whether to accept the interest rate type you will be offered.
Where to Apply
The following are just some of the banks where you can be eligible for a physician mortgage:
- Bank of America
- Bank of Nashville
- BB&T Bank
- Central Bank
- Citizens Bank
- Fairway Independent Mortgage
- Fifth Third Bank
- Huntington Bank
- Physician Loans
- Regions Bank
- Republic Bank
- SunTrust Bank (Truist)
- US Bank
Doctors are in the best position to understand the importance of preparing for the future, whether you had to get a student loan to graduate from med school or you witnessed patients getting bankrupt in the process of paying for medical expenses. They are also in the best position to avail of benefits that are not offered to many people via physician mortgage loans. The doctor loan option is a marriage of the best features of conventional loans and government-backed loans.
After a careful review of your cash flow and your personal credit history, there’s no reason why you shouldn’t arrive at the right decision when it comes to settling in your dream home.