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The Physician Mortgage

Many physicians struggle to find a conventional mortgage that meets their needs. This is especially true for new physicians who may have a low salary during residency, minimal savings, and student loans that are through the roof. Depending on the amount of debt you’ve taken on (and whether you’ve been consistent in making payments), you may also struggle with a lower-than-average credit score as you start your career. This could translate to higher mortgage interest rates and higher lifetime payments. 

As a result, many physicians avoid homeownership until they’re more established in their careers. However, the emotional benefits of owning a home can sometimes outweigh the financial drawbacks. If you’ve settled into a job and a location you love, have a growing family and want the stability or emotional security of homeownership, waiting to buy may not make sense. 

Luckily, there’s an alternative to a traditional, conventional mortgage. The Physician Mortgage is a unique type of home loan specifically for medical professionals. This mortgage can help new physicians lock in low-interest rates, avoid a colossal down payment, and reduce the total amount they have to pay over the life of their loan. Ready to learn more? Let’s dive in.


What is a Physician Mortgage?

A physician mortgage is a homeowner’s loan that is only available to qualifying medical professionals. There are fewer restrictions than you might find with conventional mortgages because they’re largely dependent on the calculated future earnings for physicians. For newer physicians, this is an attractive concept. 

As a resident or fellow, your salary is notably lower than it will be in the next few years as an attending. In some cases, lenders will even accept an offer letter of employment as proof of income. This can dramatically impact your total debt-to-income ratio in the eyes of a mortgage lender, especially as you start your career. 


What are the Benefits of a Physician Mortgage?

Physician mortgages have a laundry list of benefits. Let’s go over a few of the key benefits you can expect when searching for a mortgage that meets your needs.


Down Payment

When you apply for a conventional mortgage, you need to put a minimum of 20% of the total purchase price down in order to avoid Private Mortgage Insurance (PMI). PMI is a monthly premium tacked on to your total mortgage payment that’s intended to protect your lender in the event that you can’t make payments. If you have a low down payment, you might be viewed as a “risky” borrower. In these cases, the PMI you pay is a sort of assurance to your lender that they’ll be covered if you default. 

However, with a physician mortgage, you sidestep PMI entirely, even with a minimal down payment. In fact, many physician mortgages don’t require a down payment at all. You can put $0 down and still lock in a low-interest rate and skip the PMI - not a bad deal! Of course, if you can, putting some money down will still decrease your total monthly payment and the interest you pay over the life of your loan. 


Debt to Income (DTI) Ratio

When borrowing a conventional home loan, they will often require a DTI ratio of 43% or less. If you’re saddled with hefty medical school loans, staying within that percentage may seem like a distant dream. However, physician mortgages don’t consider your full student loan payment to be part of the debt amount they use to calculate your DTI. 

That’s right - a physician mortgage only counts the total monthly payment you make through an Income-Driven Repayment Plan (IDR) as part of your total DTI. So, if your monthly payment toward your loans is relatively low due to a lower starting salary when you apply for your mortgage, your total DTI will be significantly lower than if you were to use your full loan value as part of your calculation. 


Loan Limits

Through conventional mortgages, the most you can borrow for a “jumbo” loan is between $500,000 and $800,000 depending on where you live. Physician mortgages don’t have this same borrowing cap, which can provide more flexibility for physicians and their families. Keep in mind, however, that just because you can borrow more than you would be able to through a conventional loan doesn’t mean you should. Physicians should still look to borrow within (or below) their means to maximize their salary.


Interest Rates

recent study showed that physician mortgage rates are on par with conventional jumbo mortgage rates. However, this isn’t always the case. Your interest rate will still largely depend on your unique financial situation. It can be helpful to look at a physician mortgage calculator to get a ballpark idea of what you can expect. 


What are the Drawbacks of a Physician Mortgage?

A physician mortgage may sound like a best-case scenario, especially if you’re a relatively new physician looking to purchase a home for your family. However, there are a few drawbacks that may influence whether or not you decide to pursue a physician mortgage for your home-buying journey.


Interest Rates

With a conventional mortgage, you can often select a fixed mortgage rate that makes it easier to anticipate your mortgage expenses for the life of your loan. A physician mortgage, on the other hand, will usually come with a variable interest rate. Variable rates can be financially dangerous, especially if you’re planning to stay in your home for the long term. 

Variable rates often increase over time, which might mean you end up paying more over the life of your loan. You always have the option to refinance in the future, but variable rates can be sneaky. Your monthly payment may slowly increase without you noticing, and by the time you think to refinance you’ve already been overpaying.

Another drawback to physician mortgage interest rates is that they’re often higher than conventional mortgages. Some conventional mortgages have interest rates of 3.5% or lower, and many physician mortgages may sit closer to 3.75% or higher (rates as of 3/2020), depending on your unique financial situation. Although the difference may seem minimal, keep in mind that even a small interest rate difference can have a large impact over time. 


Limits on Primary Residence Types

Some lenders won’t allow you to take out a physician mortgage on a condo as your primary residence. Similarly, they have limits for rental properties and vacation homes. These types of residences often are associated with higher risk, and lenders put limitations in place accordingly. 


Who Qualifies for a Physician Mortgage?

To qualify for a physician mortgage, you usually have to be one of the following:

  • Medical resident

  • Fellow or attending physician (7-10 years out from medical school)

  • Dentist or veterinarian


You will also need:

  • A degree or proof of education

  • Signed contract indicating future salary

  • A good credit score (often 700 or above)

  • Deferred student loans

  • DTI ratio of 45% or less (not including your full student loan amount)

Every lender will have slightly different requirements. Make sure you shop around to see if you meet the requirements for different lenders.


What are the Monthly Costs of a Physician Mortgage?

Your total monthly mortgage payment will be comprised of several factors:

  1. Principal

  2. Interest

  3. Taxes and insurance

  4. HOA fees (if applicable)

Principal: This is the total amount that you’ve taken out for your mortgage or the purchase price of your home. A percentage of your total mortgage payment goes toward your mortgage principal every month. Paying down your principal should be your primary goal. The sooner you can pay off your principal, the less you pay in total interest. 

Interest: Depending on your mortgage rate, you’ll pay a percentage of interest over the life of your loan. The longer you pay on your mortgage, the less interest you owe because the total principal amount of your mortgage slowly decreases. 

Taxes and insurance: Your homeowner’s insurance and property taxes are rolled into your total monthly mortgage payment. This is referred to as escrow, however, you can also pay these items separately too. Just be sure to be saving for those bills since they will be larger. Be aware that this number can fluctuate from year to year!

HOA fees: Depending on where you buy, you may pay HOA fees as a monthly payment. These won’t be part of your mortgage payment, but they are something to keep in mind as part of your total housing costs!


Where Can You Find a Physician Mortgage?

There are a variety of lenders in every state who offer physician mortgages. For more information on realtors and lenders, check out the resources page from The White Coat Investor for a state-by-state breakdown and the Physician on FIRE.


Is a Physician Mortgage Right For You?

For many young physicians, a physician mortgage seems appealing. They effectively make it possible to purchase a home in spite of high student loan debt and a low starting salary. However, just because you can take out a physician’s mortgage doesn’t necessarily mean you should. For many new physicians, continuing to rent and live beneath their means can help them to boost their savings and net worth in the long run. Renting has several benefits, including:

  • Location flexibility. When you first get started in your career, there’s no telling where you’ll live in 1-5 years. Renting makes it notably easier to relocate for advanced career opportunities.

  • Lower responsibility. As a new physician, your primary focus will be growing your career. The last thing you need is unnecessary responsibility, distraction, or expense. Owning a home means the responsibility and expense of maintenance and repairs, and the distraction of ongoing upkeep. Renting means that large repairs are covered by your landlord and, in some cases, landscaping and aesthetic maintenance are also covered. 

  • Cash flow. An adjustable-rate physician’s mortgage might make it challenging to budget for monthly cash flow as your mortgage payment changes. Renting means a consistent payment that makes budgeting and cash flow strategy much easier.

Bonus Resources: What Issues Should I Consider When Buying a Home workflow. The real life physician mortgage story from the Physician on FIRE.

Unfortunately, the decision to rent or buy isn’t usually as cut and dry as choosing the best financial option. Homeownership is an emotional marker of success, and for many people, the emotional security it provides is worth the financial cost. 

If you’re considering buying a home with a physician’s mortgage, especially as a new medical professional, you should speak with your financial planner and mortgage broker to weigh all of your options. Together, you can determine whether homeownership fits within your long term financial strategy - and which mortgage makes the most sense given your unique financial needs.

Looking for a more thorough all-in-one spot for your financial life? Check out of free eBook, A Doctor’s Prescription to Comprehensive Financial Wellness.

Written by Chad Chubb, CFP®, CSLP®


Disclosures:
This information is for general purposes only. This information is not intended to be a substitute for specific professional financial or tax advice, as individual circumstances vary. Please see a financial professional in regards to your own individual situation.