All Your Queries on Physician Loans Answered

69% of medical students sponsored their studies through a loan in 2023. Most of them had already accrued a median debt of $215,000 by the time they started their practice. These figures highlight why professionals in this field often need to rely on loans.

Physician loans have gained prominence in this area. They help address issues like limited cash flows and poor debt-to-income ratios that can deter your ability to buy a house as a doctor. They are also easier to qualify for than most conventional loans.

With thousands of listings and a host of tools that only agents have access to, you can find your dream home right here. Filter parameters based on your conditions, and that’s all you need to get started! In the meantime, let’s look at physician loans in more detail.

What Is a Physician Loan?

A physician loan, also known as a ‘doctor loan,’ is a specially crafted mortgage instrument for medical professionals. This mortgage instrument does not have a downpayment requirement.

In addition, the requirement to pay PMI (Private Mortgage Insurance) when the downpayment is less than 20% is waived in this case. 

How Do Physician Loans Work?   

Physician loans are quite different from conventional mortgage loans. The traditional alternatives have both fixed and adjustable interest rates. On the other hand, physician loans are only available as ARMs (Adjustable Rate Mortgages).

Physician loans are popular because they are flexible, do not require PMI (Private Mortgage Insurance), and can have down payments as low as 0%. This makes the loan highly attractive to doctors starting their practice with poor DTI scores. 

Here is a brief explanation of the technical, financial terms discussed above:

• ARMs (Adjustable Rate Mortgages): ARMs are loans with interest rates that are linked with a collection of market shares (such as a government benchmark or index). Initially, ARMs typically have a fixed interest rate for a set period before they adjust regularly.
• PMI (Personal Mortgage Insurance): In a loan contract, lenders often require borrowers to purchase a PMI. This protects the bank or financial institution in case the borrower defaults. This is especially critical when the down payment is less than 20% of the home’s value. 
• DTI Ratio: The ratio between the money spent on debt (interest and repayment) and an individual’s total income is called a DTI Ratio. Lenders use it to assess an individual’s ability to manage monthly payments and repay debts. 

Who Qualifies for Physician Mortgage Loans?

To obtain a physician mortgage loan, you must have a medical degree that meets the lender’s criteria. Generally, these loans are offered to people with the following degrees:

• Doctors of Osteopathic Medicine (D.O.)
• Doctor of Science (D.S.)
• Medical Doctor (M.D.)
• Doctors of Dental Medicine (D.M.D.)
• Doctor of Dental Surgery (D.D.S.)
• Doctors of Podiatric Medicine (D.P.M.)
• Doctor of Veterinary Medicine (D.V.M.)

The above list is not exclusive or exhaustive in nature. There might be other acceptable degrees within the purview of physician mortgage loans by different lenders. In addition, banks or financial institutions providing such a loan might ask for proof of employment and income details. 

Property Qualification for a Physician Loan

Physician loans can be used to buy or refinance a primary residence property only. It is critical to know how mortgage refinancing works for a typical borrower before choosing this alternative. 

It is worth noting that a doctor purchasing a property with a physician loan cannot hold the property as an investment asset. For most of the financial year, such a house must be used for residential purposes. Additionally, this loan cannot be used to finance a condo. 

Which Lenders Offer Physician Loans?

Many banks, independent mortgage companies, and financial institutions offer doctor or physician loans. Here is a list of lenders that offer this type of loan option:

• Bank of America
• TD Bank
• Trust
• Valley Bank
• First National Bank
• Fifth Third Bank

These lenders’ loan terms, conditions, and requirements differ greatly. Our advice in such situations is always to compare offers from various lenders and decide if a loan suits your requirements. 

Pros and Cons of Physician Loans

Here are the most critical pros and cons of physician loans:

Pros

• Up to Zero Percent Down Payment: As the down payments are low or zero, home buying becomes more accessible for new doctors who may not have substantial savings​.
• No PMI Required: There are no requirements, even if the down payment is less than 20%, reducing monthly payments​.
• Flexible Debt-to-Income Ratios: The focus of the lender is often on the potential earnings rather than the existing ratios.
• Student Loan Considerations: Many physician loans offer favorable treatment of student loan debt, not counting it fully against the borrower’s debt-to-income ratio​.

Cons

• Higher Interest Rates:  This can increase overall costs over time​​.
• Strict Eligibility Criteria: These loans are for specific medical professionals and often need employment proof.
• Limited Lender Options: Only a few lenders offer physician loans, which might limit the flexibility in choosing loan terms and providers​.
• Limited Property Types: Some physician loans may restrict the types of properties that can be purchased, such as investment properties​.

Physician Loans Interest Rates

Interest rates for these loans can vary due to several factors. The lender type, market conditions, and specific loan programs for medical professionals can all influence the rates. Here are some factors that help lenders decide what rate to charge you:

• Loan terms affect interest rate variability. Fixed-rate mortgages have constant rates, while adjustable-rate mortgages (ARMs) can change over time. However, ARMs often have an initial period with fixed rates, after which they change yearly. 

• The loan’s duration can affect the rate directly. Interest rates can vary greatly for 15-year vs. 30-year loans.

• A borrower’s credit profile is crucial in determining interest rates. Higher credit scores of or above 700 generally lead to better rates. 

• Stable employment, a secure contract, and a lower debt-to-income ratio can also result in more favorable loan terms.

• Typically, interest rates for these loans range between 5% and 10%. Some lenders may offer additional discounts for setting up automatic payments.

Alternatives to Physician Loans

Here are a few alternatives you can consider besides a physician loan:

1. Conventional Loans

Conventional loans are traditional mortgage options that are not insured by the government. They usually offer lower interest rates than physician loans but come with a predefined qualification criterion. Borrowers typically need a good credit score and a substantial down payment. 

Additionally, if your down payment is less than 20%, you must pay for Private Mortgage Insurance (PMI), making the loan more expensive. 

2. FHA Loans

FHA loans, backed by the Federal Housing Administration, are a good option for doctors with a healthy credit score of 500 or higher. These loans are ideal for limited savings since they require a lower down payment, sometimes as low as 3.5%. 

However, FHA loans also come with mortgage insurance premiums (MIP), which are required regardless of the down payment amount. 

3. VA Loans

VA loans are available to doctors with military experience. These loans, backed by the Department of Veterans Affairs, do not require a down payment or mortgage insurance, making them an excellent option for eligible veterans. 

Are Doctor Loans a Good Idea

Physician loans can be an excellent option for young medical practitioners looking to buy a home. These loans have several advantages like low or no down payments and no PMI. However, they also carry higher interest rates and strict eligibility criteria.

Conditions offered by different lenders can vary significantly, so it’s essential to compare and contrast offers. You must factor in your DTI, student loan payments, and long term financial goals to finalize a plan that works for you.

If you’re looking to take out a physician’s loan but don’t know how to, Houzeo has got you covered. Check out our list of mortgage lenders around you to find one that offers loan terms best suited to your needs. So, why wait? Your home buying journey starts here!

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