Physician loans help new doctors buy a home

Many people who aspire to become medical doctors are motivated by the desire to save lives and help other people. Of course, it doesn't hurt that doctors are also paid lucrative salaries for their services.

But while a career in medicine can net you a substantial annual salary, it also comes at a cost. According to the Association of American Medical Colleges, the average medical school graduate in 2016 had a debt of $180,000.

A debt burden this large can make it particularly difficult for new doctors to purchase a home. Warren Christopher Freiberg, writing for the National Association of Realtors, says most mortgages require your debt-to-income ratio to be no higher than 43 percent. This means that your cumulative monthly debt payments, such as student loans and car payments, should not be more than 43 percent of your monthly income.

Even if a doctor's salary is sufficient to pay off their significant student loan debt, it will still take some time before their debt is low enough to avoid worrying a lender. Lisa Prevost, writing for the New York Times, says homeownership among physicians can be further delayed since new residents receive lower salaries and may not have much of a financial history for a lender to review.

For these reasons, many lenders offer a special arrangement called a physician loan. This type of mortgage is structured to take a new doctor's high debt load into consideration and help them into a home. The loans offer more lenient terms on the assumption that the doctor's earning potential will offset the risk.

Physician loans can be beneficial for the lending institution as well. The real estate site Zillow says the default rate on this type of loan is typically lower than other mortgages. In addition, it introduces the lender to wealthier clients who might be willing to patronize bank for other services.

Like many buyers entering the market, a recently graduated doctor may not have enough money to make a significant down payment. Daniel Bortz, also writing for the National Association of Realtors, says a physician loan usually requires only 10 percent of the purchase price, if not less. The loan also waives private mortgage insurance, which usually applies to any mortgages where less than 20 percent of the purchase price is put down.

Buyers who have deferred their student loans have to disclose this fact when applying for a mortgage, since this debt will eventually have an effect on their ability to make payments on the home. In a physician loan, however, deferred medical school loans are not considered a detriment.

Physician loans vary from lender to lender. There is usually an opportunity to choose between a fixed rate or adjustable rate mortgage. Lenders are also willing to approve larger balances, often up to $1 million. Zillow says physician loans won't be subject to higher rates even if they fall into the category of a jumbo loan, which is greater than $417,000.

There are several restrictions for getting a physician loan. Bortz says only certain doctors will be able to qualify. Dentists, veterinarians, and pediatricians are some examples of doctors who can get a physician loan. Other medical professionals, such as chiropractors and dietitians, may not be able to qualify.

The lender must see an employment contract as proof of the applicant's future earning potential. This information will demonstrate that a new doctor will have the ability to make monthly payments on their mortgage.

As with any mortgage application, lenders will look for a reliable credit score. Physician loans typically require the applicant to have a score of at least 680 to qualify.

New doctors will have to decide whether a physician loan is right for them. Prevost says that while they are more forgiving, they also tend to come with higher interest rates or fees than a conventional mortgage. Residents may also find that they need to relocate after only a few years on the job, which could increase their risk of being underwater on their loan if home prices fall during that time.

Daniel Wrenne, of Wrenne Financial Planning in Lexington, Ky., says doctors also shouldn't be tempted into buying a home that is too big for them simply because they will qualify for a larger mortgage under a physician loan. He suggests that waiting to earn a 20 percent down payment can result in significant savings over the life of the loan due to lower interest rates on a conventional loan.