Physician loans are a lending option specifically designed for new doctors.
These loans were created for the unique debt, income and employment situation of a medical professional who is just getting established.
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These types of professionals often have high amounts of debt from school but have the potential to earn a significant income immediately in their careers.
As a result, doctor loans have more options for loan forgiveness and higher loan limits.
Physician loans can be a great option for many medical professionals. Let’s take a look at how physician loans work, as well as the lending alternatives that are available.
What is a physician loan?
A physician loan offers more flexible requirements to qualifying borrowers.
The loans were designed with the understanding that new doctors often have many student loans and debt, and they don’t yet have the income or employment proof if they’re just starting out in their careers.
Physician mortgage loans usually don’t require a down payment or private mortgage insurance (PMI). They also have more flexible debt and income requirements, and they have higher loan limits.
Lenders who offer physician loans are willing to offer these more flexible requirements because they are taking into account a doctor’s income potential.
Doctors often are able to quickly make a substantial amount of money when they begin their careers, but they don’t yet have proof to show a mortgage lender.
Some medical professionals would not be able to qualify for a loan without the flexibility that physician loans provide.
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How does a physician loan work?
Physician loans generally offer the following benefits to borrowers:
- No down payment required
- No PMI
- Higher debt-to-income (DTI) ratio
- Higher loan limits
- Flexible income and employment requirements
Conventional loans are among the most common types of mortgage loans. These loans require a minimum down payment amount; and if you put down less than 20%, you’re required to pay PMI.
Physician loans often don’t require a down payment or PMI, because lenders instead want to allow borrowers to focus on paying down their student loans from school and making their monthly mortgage payments on time.
Conventional purchase loans usually require a DTI at or below 50%. Some lenders may allow an even higher DTI ratio for doctor loans because they understand medical professionals have acquired a lot of student loans and debt from school.
Can only doctors get a physician loan?
Doctors must have certain degrees to qualify for a physician loan, which include the following:
- Medical Doctors, Dentists, Podiatrists, Ophthalmologists, Veterinarians, Medical Doctor (MID, DO, OD, DPM)
- Dentist (DDS, DMD)
Physicians who are completing their residency or fellowship also may still qualify for a loan if they are able to verify their employment status and income.
What are the pros of a physician loan?
Physician loans offer qualifying borrowers the potential for no down payment and no PMI, which can provide significant savings.
The money borrowers save on these payments can then be used to pay down their student loan debt, allowing them to focus solely on their monthly mortgage payments.
Doctor loans also offer more flexible documentation requirements, including proof of income and employment.
What are the cons of a physician loan?
All loans have their pros and cons, and physician loans are no exception.
While doctor loans offer many benefits to qualifying borrowers, there are a few potential drawbacks that they must consider.
Physician loans are for primary residences only, and certain property types may not be allowed.
Doctor loans also usually have adjustable rates, meaning they begin with a lower introductory rate and then fluctuate after this initial period ends. These loans also may have higher interest rates than other loan types.
Perhaps the biggest drawback to a physician loan is that without a down payment on your home, you have zero equity. With zero equity, you run the risk of owing more money on your home than what it is worth.
Can you refinance a doctors loan?
Borrowers can refinance a physician loan to another physician loan, or refinance to a conventional loan.
This is helpful for borrowers who may not have initially qualified for a conventional loan but were able to pay down their debt and increase their income enough to qualify later and save.
Alternatives to a physician loan
Physician loans aren’t for everyone. Fortunately, there are other loan options for doctors that allow lower down payment amounts and fixed rates.
FHA loans are backed by the Federal Housing Administration. A government-backed loan can offer borrowers more flexible options because the loans are less of a risk to lenders.
FHA loans generally allow lower down payment amounts and lower credit scores, which allows a wider range of borrowers—including new doctors—to qualify.
If you’re a new physician who is able to put down at least 3.5% with a credit score of at least 580 and a DTI of 50% or lower, you may be able to qualify for an FHA loan.
If you are an active-duty service member, a veteran or a surviving spouse, a VA loan may be right for you.
VA loans are backed by the U.S. Department of Veterans Affairs and, similar to physician loans, they offer borrowers the potential for no down payment amount orPMI.
They also generally allow lower interest rates, lower minimum credit scores and higherDTI.
If you are a new physician and can also prove you are eligible with a Certificate of Eligibility, you may qualify for a VA loan.
Conventional loans require a credit score of at least 620 and a down payment of at least 3%; but if you meet the requirements, you gain access to better options for your mortgage insurance, term lengths, closing costs and interest rate than other loan types.
If you’re able to save up for a down payment and improve your credit score before purchasing a home, a conventional loan is a great option for new doctors.
A conventional loan is also great as a refinance option down the road if you start with a physician loan and refinance to a conventional loan later.
How do I apply for a doctor loan?
Compass Mortgage is happy to offer physician loans to qualifying borrowers.
We care about your financing needs and promise to be your partner and advocate throughout every step to help you find the most affordable loan.
Through this program, borrowers will go through most of the steps in the loan process to secure a loan commitment before they even make an offer on a home.
Our loan commitment means that the only conditions left to clear are for the property you want to purchase. The financing is secured, meaning we can close on your loan in as little as 15 days.
If you have any questions about physician loans or your other loan options, we’d love to hear from you.
Reach out to our team today so we can work together to complete your financing needs.
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