The Rise of Physician Mortgage Loan Programs

Most people would assume that doctors and dentists should have no trouble qualifying for a home mortgage.

Physicians typically have significant income or at least have the potential to do so once their practice is established. They have stronger job security than most professions, and their chances of defaulting on their mortgages are lower than the average borrower.

On the other hand, physicians don’t always meet the minimum requirements of traditional mortgage lenders, despite their income potential. This is especially true if they’re still in residency or just starting in professional practice.

Because they typically spend several years and hundreds of thousands of dollars on their training, most have no savings to put toward a down payment. Student loan debt payments may also prevent them physicians from qualifying for a traditional mortgage because lenders measure a borrower’s total debt load and compare it to their overall income.

Bridging the mortgage lending gap

To bridge this gap, many mortgage lenders have in recent years introduced physician mortgage loans .

This is a special type of mortgage that only doctors and other medical professionals can qualify for. Typically, you can qualify for a physician mortgage if you are a medical resident or a licensed medical doctor. You can also qualify if you are a doctor of optometry, osteopathy, ophthalmology, podiatry, dental medicine or dental science.

The philosophy behind a physician loan is that medical professionals are low-risk borrowers, despite some attributes that traditional lenders would consider high-risk. Banks offering this type of financing take the approach that a doctor’s income potential will more than offset the risk of having student loan debt and little in savings.

Why conventional mortgages often don’t work for physicians

The reasons that traditional mortgage lenders have tight restrictions is that they issue loans with the intention of selling it to a government sponsored entity like Fannie Mae or Freddie Mac.

These entities have somewhat tight restrictions on mortgage applicants that the issuer must adhere to if they want to sell the loans later. These restrictions have become tighter in recent years because of the effects of the 2008 financial crisis, which was caused in large part by substandard mortgage lending standards.

Restrictions that Fannie and Freddie place on conventional mortgage loans include:

• A history of earned income
• Enough cash on hand to make a down payment. The minimum for special mortgage programs is 3 percent of the purchase price. Any amount less than 20 percent down usually requires private mortgage insurance
• A limit on your debt-to-income ratio, which factors in your total monthly income compared with the minimum monthly payments on all current debt
• A limit on how much you can borrow, meaning that many high-end homes cannot qualify for conventional mortgages

How physician loans differ from conventional mortgages

Physician loans get around these restrictions because the institutions making this type of loan plan to keep them and not sell them. Thus, they can offer relaxed underwriting guidelines and waive some of the requirements of conventional loans, including:

No PMI.Conventional mortgages in which the borrower pays less than 20 percent of the purchase price as a down payment will almost always require private mortgage insurance (PMI). This is to protect the lender in the event of default. It is an added monthly cost — as high as 5 percent of the original loan amount — to your monthly mortgage payment. A physician loan, on the other hand, almost never requires PMI.

Income history:Physician loans will allow doctors to close on their homes before they begin work, provided they have a contract or offer letter. Self-employed medical professionals can qualify with as little as six months of historical income, versus traditional mortgages that require two years of 1099s.

Debt-to-income:Physician loans either recalculate the impact of student loan debt or dismiss it altogether, making it easier to qualify.

Down payment.Even the most accommodating mortgages in the conventional marketplace require a 3 percent down payment. That’s the equivalent of $15,000 for a $500,000 home. While not all physical loan providers will offer 100 percent financing, some will, especially for lower mortgage amounts.

Jumbo loans allowed.Physician loans are often considered jumbo mortgages as they allow higher loan balances than conventional and FHA mortgage loans. Conventional mortgages limit loan amounts to $453,100 in most of the country, with higher limits available in certain parts of the country where home values are higher.

A physician mortgage lender may enable doctors to buy homes for $1 million to $2 million, or even higher, depending on whether you’re a resident or practicing physician, and whether you have a down payment. The limit on a physician loan is dictated by the actual lender, not by Fannie Mae or Freddie Mac guidelines.