Young physicians have some of the highest mortgage underwriting decline rates of any professional seeking real estate financing. This should not come as a surprise, as most residents have a negative net worth (typically loans far exceed assets) and many coming straight out of medical school have not filed taxes in years.
How does one qualify for a mortgage with a negative net worth and little if any documentation of income?
To solve these challenges, the physician home loan—or doctor mortgage as it is also called—was created to overcome the challenges physicians in training and new attendings face when trying to qualify for home loans.
What is a physician home loan?
There are three primary benefits of a physician home loan that you should know:
First, these loans typically require lower down payments than conventional loans. Down payments from zero to three percent are available in all fifty states. There are also down payment grants available to qualifying applicants in some areas of the country. These grants typically do not require any repayment and are not taxed as income. The grant funds can be used for a down payment and to cover acceptable closing costs, enabling you to potentially purchase a new home with literally nothing out of pocket.
Physician home loans also do not typically have mortgage insurance. Mortgage insurance is a forced insurance policy that protects the bank in case of borrower default; it is paid by the borrower but only protects the bank making the loan. This insurance is expensive and in most cases is not tax deductible like mortgage interest is.
Second, physician home loans allow you to close up to ninety days before you begin a new employment contract using future income. This is significant for physicians relocating across the country, needing to get their family settled and their house in order before they start a busy work schedule. Most conventional and FHA loans require 30 days paystubs before you can close on the purchase of a new home.
Bear in mind, no two physician employment contracts are created equal. When applying for a home loan, even a physician loan, you should have your employment contract reviewed by the lender as early as humanly possible so you can plan accordingly.
I recommend you insist that your employment agreement is not only reviewed and approved by the loan officer, but also by the underwriter who will eventually have the final say on your mortgage approval.
Mortgage loan officers are prone to saying yes, while mortgage underwriters are more prone to saying no if something does not fit exactly in the box. Truly, the underwriter is the gatekeeper of the mortgage transaction. They are risk control for the bank and they are literally paid to say no if certain risk factors are present.
You should understand this relationship and INSIST an underwriter review your application and employment contract before making an offer on a home. This step can save you an incredible amount of heartache and stress.
Third, physician loans also look at your student loan debt differently than conventional or FHA loans. Most do not count deferred student loans or they will allow you to use an IDR (income driven repayment) payment to qualify. This can make the difference between qualifying and being declined for a loan.
For residents with high student debt loads, this factor can make a physician loan the only option, as conventional and FHA mortgage loans are not nearly as accommodating to student loans and how they calculate their impact on the overall debt to income ratio limits.
What are the primary drawbacks with a physician home loan?
In most instances the physician home loan will have a higher interest rate than a VA, FHA, or conventional home loan. However, most student doctors are not able to put twenty percent of the home price as a down payment and thus would have to pay mortgage insurance, which can add as much as one percent per year to the cost of the loan.
Generally speaking the higher interest rate physician loan results in a lower monthly payment and greater ability to deduct mortgage interest if the client is putting less than twenty percent down payment.
Every situation is different but this is a typical case study we create for clients to help them analyze their options. You can watch the full presentation here:
Student Doctor Case Study
The other issue to be aware of with physician home loans is that they tend to be slower than other types of loans. This can be a problem if you are buying in a busy housing market with lots of competition for homes. As I write this article there is less than a four month supply of homes on the market nationally. That means the pace of monthly sales would eliminate the supply of listed homes for sale in less than 4 months (if no new homes were listed for sale).
Anything less than 6 months supply is considered a sellers market. Many areas of the country are in an extreme sellers market, which means sellers dictate the terms of the deal and the speed they want the transaction to close. You either have to agree to those terms or they pass you up and find another buyer, often a cash buyer, who can meet their terms.
This can be a monumental challenge for many physician home loan companies and you, their perspective clients.
There are a couple reasons why physician loans tend to move slower than conventional mortgages. First, many physician loan companies are large national (think too big to fail) banks and they are layered with bureaucracy, government regulations, antiquated IT systems, and status quo (good is good enough).
This is similar to the level of care you might expect to get at the largest hospital systems in New York or Los Angeles on a busy Saturday. They mean well, but they can only do what they can do with the resources they have. Nimbleness and speed to respond might not be how you would describe them.
The fact is many of the larger banks that are the purveyors of physician loans simply cannot keep up with today’s fast-paced real estate market.
You can protect yourself from this by carefully reviewing the client experiences of your fellow doctors. Do some Googling about client experiences, ask for references, and request your lender put in writing how long it takes on average to close their physician home loan clients. This is rarely thought through in detail but can make all the difference between you getting a home and the home getting away from you.
A physician home loan can be a powerful tool to help you into a home with the least amount of cash possible, sooner than most conventional loans, in many cases with less overall expense as you will likely avoid mortgage insurance. This does not mean they are the right prescription for everyone. You should speak to several lenders and find one that you feel offers a balance of the important issues discussed in this article. In the end, a trusted advisor that can help you navigate the mortgage and real estate process is ultimately going to offer you the highest probability of successfully closing on your new home.