Definition and Example of Physician Loans
Also known as doctor loans, physician loans are mortgages for medical professionals who are new to the field. Since doctors might have trouble qualifying for conventional mortgages, physician loans can help them out. Let’s say you just graduated from medical school and are about to begin your residency. You want to buy a house for yourself and your family. When you begin to apply for a traditional mortgage, you realize your debt-to-income ratio is too high. You also don’t have proof of a stable income just yet. Eventually, you come across a lender that offers physician loans and takes all your unique circumstances into consideration. Your dream of homeownership becomes a reality once you apply for a physician loan and get approved.
Alternate names: Doctor loans
How Physician Loans Work
There are a number of ways physician loans differ from conventional mortgages. First and foremost, they don’t require a down payment. You can take one out with no or little money down and won’t have to worry about private mortgage insurance or PMI. Also, a lender that offers a physician loan will be more relaxed about your debt-to-income (DTI) ratio, which is all your monthly debt payments divided by your gross monthly income. They know it can be a real challenge for a new doctor to achieve the lower DTI ratio you might need for a conventional loan. In addition, if you can’t prove your employment or income with pay stubs or W2s that show your current position, for example, an employment contract will usually be good enough. Lenders are flexible because they know you’re a fresh med school graduate who might have plans to pursue an internship, residency, or fellowship.
Pros and Cons of Physician Loans
Before you move forward with a physician loan, keep these benefits and drawbacks in mind.
Pros Explained
Many options: Even though physician loans are specialized, there are a number of lenders that offer them. You can compare the various options available to you to make the best choice for your unique situation. Can make homeownership possible: If you don’t take advantage of a physician loan, you might have to wait years before you can buy a house. A physician loan makes it easier to own a property early on in your professional life.
Cons Explained
Unpredictable rates: Physician loans are almost always feature adjustable rate mortgages (ARMs). This means you’ll pay a lower, fixed rate for a few years but eventually your rate will fluctuate and likely increase. Risk of an underwater mortgage: If you choose a small down payment, you’ll have minimal equity in your home. In the event your property decreases in value or you can’t make your payments while you still owe your original loan balance, your home loan might be higher than what your home is worth.
Alternatives to Physician Loans
If you’re a new doctor or other medical professional and don’t think a physician loan is a good fit, consider these alternatives.
Government-backed mortgages: FHA loans, VA loans, and USDA loans are examples of mortgages that are backed by government agencies. They’re typically easier to qualify for than conventional loans. Save for a 20% down payment: If you don’t mind waiting a bit, it might be a good idea to save for 20% down on a house. You’ll have a higher chance of getting approved for a conventional loan and be able to avoid PMI. A conventional loan with PMI: While a conventional loan with PMI may not be your ideal situation, it may be worth considering, especially if you can’t wait for a house. The PMI will go away once you reach 20% equity.
