How Do Physician Loan Mortgages Work? - SmartAsset

Lenders ordinarily don’t welcome mortgage applications from recent graduates with lots of debt, limited income and little or no employment history. However, when the borrowers are newly fledged physicians, some lenders can offer special physician loan programs that will overlook debt, be flexible about earnings and work record and even skip requirements for a large down payment and mortgage insurance.

If you’re a new doctor looking for help with your finances, including mortgages and loan repayment, consider working with a financial advisor.

Why Physician Loans?

When physicians are just starting out, they often have sizable student loan debt, limited savings and their first jobs may be as interns or residents who don’t pay much. Because of these limitations, they often have trouble finding lenders who will finance purchase of a home.

However, physicians also have lots of future income potential and are less likely than other borrowers to default on loans. Therefore, some banks will relax their lending standards for these borrowers in hopes of developing a long-term relationship that can be expanded to include investment advice and other services.

Physician Loan Features

One desirable feature of a physician loan is the relaxed requirement for a down payment. Most loan programs call for borrowers to put down at least 3% of the home’s price as a down payment — and often require even more. After being in school for many years, young doctors often have little savings to use as down payment. Physician loan programs address that by making loans with as little as zero down.

Also, most borrowers must pay for private mortgage insurance (PMI) if putting down less than 20% of the home’s price. However, physicians using one of these programs often won’t have to have to pay PMI even with no money down. Annual premiums for PMI can reach 1% of the home’s value, so this potentially is a significant savings.

Physician loan programs also are often willing to relax debt-to-income (DTI) requirements for loan approval. Generally, lenders require a DTI ratio of no more than 43%, indicating the borrower has committed no more than that much of his or her income to monthly payments on credit cards and other loans.

However, doctors often accumulate large student loans while earning medical degrees. As a result, many have high DTI ratios. Doctor loan programs will likely accept higher DTI ratios for physician borrowers so they can qualify for mortgages.

Lenders also require most applicants to prove employment and verify their income, typically by providing W-2 forms or paycheck stubs. However, doctors working as residents, interns and fellows may be approved for a loan if they can show lesser proof, such as a contract of employment.

Physician Loan Limits and Risks

Physician loans have significant limits as well as risks. To begin with, they generally only are available to people who have earned medical degrees such as:

M.D. — doctor of medicine
D.O. — doctor of osteopathic medicine

Physician loan programs may also be available to professionals who have earned other healthcare designations including:

P.A. — physician assistant
N.P. — nurse practitioner
D.D.S. — doctor of dental science
D.V.M. — doctor of veterinary medicine
D.P.M. — doctor podiatric medicine
O.D. — doctor of optometry

Some loan programs will accept other professionals with high future earnings potential, including engineers and software developers. However, most occupation-specific loan programs target healthcare professionals.

Another limitation of physician loan programs is that they can only be used to purchase a primary residence. They can’t finance acquisitions of investment property or a vacation home.

Because physician loan programs often require little or no down payment, buyers start off with little or no equity. This means if home prices decline even slightly, the buyer may owe more on the mortgage than the home is worth.

These loans often have higher interest rates to start with than other loans. That means in the long run a physician loan may cost more than a comparable conventional loan.

Furthermore, physician loan programs generally have adjustable interest rates. This means physician borrowers run the risk of having to make higher mortgage payments in a few years when the loan interest rate adjusts.

Finally, many lenders do not offer physician loans. You can see an online directory of financial institutions that offer doctor loans here.

Bottom Line

Physician mortgage programs let recently minted doctors and other healthcare professionals obtain home purchase loans on favorable terms. Doctor loan applications can be approved with little or no down payment and despite high debt and limited employment history. Borrowers may not have to pay private mortgage insurance as well. However, doctor loans usually have higher interest rates than other loans, and rates are also often adjustable.

Homebuying Tips

If you are a recent graduate with an advanced healthcare degree, you may want to discuss your home financing options with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Alternatives to physician loans include FHA loans with as little as 3.5% down, conventional loans with as little as 3% down, VA loans that can fund home purchases by eligible veterans with no down payment and USDA loans available to low- to moderate-income buyers in certain locations. Piggyback loans can also help buyers who lack down payments get approved.