The anatomy of a physician home loan…and why it may be the right mortgage for you.
Homeownership is still the bedrock of financial success in America, and that stands true for doctors and physicians as well. In fact, a study by Harvard University’s Joint Center for Housing Studies found that the average net worth for homeowners was 47.5 times greater than the comparable net worth for renters.
However, physicians often run into a prognosis of frustration when applying for home loans, despite their prominent financial standing.
Thankfully, M.D.s, doctors, and other healthcare professionals have access to a solution tailor-made to their lending and housing needs: Physician Mortgage Loans.
Let’s examine the 7 profound benefits of a Physician Mortgage Loan:
1. Low (or no) down payment:
Typically, home loans require some sort of down payment in order to secure the property and move in. Traditionally, that was 20% down, but lending requirements ebb and flow as the banks (and insurers who back these loans) adjust their risk tolerance and requirements. Even so, most people end up putting 5% down, 10% down, or at least 3.5% down with an FHA (Federal Housing Authority) loan.
But, with a specialty doctor’s mortgage loan, you can put down little or nothing on your home purchase. That’s a huge advantage if you consider that even 5% down on a $547,000 home (about the median home price in California) equals $27,350 – a significant expenditure.
That’s money that could be better spent paying down your student loans, investing in your budding practice, other investments, or just as liquid savings.
2. Avoid paying Private Mortgage Insurance
Private Mortgage Insurance, or PMI, is usually an unfortunate necessity when you’re only offering a small down payment on a home loan. For instance, FHA loans, which do allow you to pay only 3.5% down, come with PMI. What’s more, this isn’t insurance for you, the homeowner or mortgage holder, but for the bank in case, you default!
PMI can add up quickly, impacting the real cost of your loan. Most banks assign a PMI factor ranging from 0.3% to 1.2% of the loan amount per annum. Only when you have accrued more than 20% equity in the property can the PMI be removed, which could be years.
So, on a million-dollar home, that 1% PMI could cost you $10,000 with no tangible benefit to you.
The good news is that most doctors loans allow you to circumvent paying PMI even with no down payment, which pencils out to a whole lot of savings each year.
3. Student loan debt doesn’t hurt your qualifying ratios
Since you’re an M.D., physician, or medical professional, you’re probably all-too-familiar with student loans. In fact, the Association of American Medical Colleges (AAMC) reports that the average M.D. now graduates with $200,000 in student loan or educational debt.
It’s certainly a seminal day when you can pay off your student loans, but, until then, their mere presence can impede you when it’s time to qualify for a home loan.
Lenders qualify a prospective mortgagee based on their ratio of debt-to-income (among other factors). They want to see that all of your payments on monthly revolving or installment debt stay below a certain threshold (such as 38%, 43%, etc.) of your monthly income. To the bank or lender, this signals that you can really afford the new proposed monthly mortgage payment.
However, since physicians and doctors have inordinately higher levels of student loan debt, it’s much harder to fit beneath those debt-to-income ratios.
But with a doctor home loan, the student loan payment obligation isn’t counted against you at all when the bank calculates your ratios. The result is that you will have a much easier time qualifying for the mortgage amount you want (and deserve, based on your future income), and can procure a great home loan for a higher-priced property.
4. Elevated loan limits to avoid jumbo loans
Most home loans fall beneath the conforming loan limits set by the Federal Housing Finance Agency. In most areas of the country, that means your loan has to be under $453,100 so it won’t be considered a jumbo loan, which comes with higher interest rates, fees, and stiffer requirements to qualify.
Of course, in high-cost states or areas like California, you’ll run into those jumbo loan limits quickly when home shopping, even though they do make allowances that bring loans limits up to $625,500 in counties such as San Francisco, Los Angeles, Orange County, and Santa Barbara.
However, with physicians loans, those conforming loan limits don’t apply, so you may be able to borrow up to $5,000,000 without running into jumbo loan parameters and pricing.
5. Ease of underwriting
While doctors and physicians are financially attractive borrowers and pose little risk to mortgage lenders, their underwriting standards and the approval process don’t reflect that. Trying to get even a well-established physician-approved for a conventional loan can mean endless paperwork and underwriting hassles, taxing your valuable time – and patience. But, with a physician home loan program, the underwriters and banks understand their borrowers’ unique circumstances, and approve loans accordingly!
6. Close a loan prior to starting new employment
If you’re buying a home because you were just relocated to start a new position, this home loan program has a handy feature that allows you to close your home loan 90 days before commencing that new job, easing the stress and hassle.
Usually, lenders will accept just an offer letter as proof of income for your upcoming post.
7. Multiple uses of the physician home loan program
There’s usually no limit to the number of times you can take out a doctor home loan. Although you can’t hold two of these loans simultaneously, your spouse may be able to qualify based on your shared household income and financials.
Either way, a physician home loan is an invaluable financial resource and another useful club in your bag, so to speak!
Of course, there are some nuances and potential drawbacks to these physician loan programs, like a slightly higher cost at origination or interest rate, and lenders may not allow you to purchase a condominium with this loan, etc.