Is a Physician Mortgage Loan the Right Choice for You?
Physician mortgage loans can be advantageous for those with student loans, high interest debt or cash flow constraints. These loans usually don’t require private mortgage insurance (“PMI”), even with less than the typical 20 percent down payment, and they oftentimes have less stringent underwriting requirements. The loan amount and interest rate are dependent on how far along the physician is in his or her training or career. For example, an intern or resident will not be approved for as much as an attending physician. The loans can also be used for buying or refinancing a primary residence; however, they are not typically available to purchase a second home or investment property.
There are several ways a physician mortgage loan is different than a conventional mortgage.
- PMI – One of the key differences with a physician mortgage is that PMI is not required even if the down payment is less than 20 percent. PMI can add hundreds of dollars to the monthly payment, which can be better used to pay down other debt, fund disability or life insurance premiums, or to pay for other obligations such as childcare. (Note: We oftentimes see cash flow improve greatly after young children reach an age where full-time childcare is no longer necessary. That can be a great time to reassess your debt obligations and increase savings for retirement or your children’s education.)
- Debt-to-income ratio – Lenders want borrowers who have a low debt-to-income ratio. Because many physicians finish training with a large amount of debt, they can be penalized for having to foot the bill themselves for much of their schooling, making it difficult to qualify for a conventional mortgage. However, a physician mortgage loan typically excludes medical school debt when calculating the debt-to-income ratio, making it easier for physicians to qualify.
- Employment contract – Unique to the physician mortgage loan market is that an employment contract usually satisfies the requirement for having a job and earning an income. However, the employment contract will need to be in effect within a certain period of time (typically less than one year) before the lender will accept it.
If you’re a physician, a physician mortgage loan probably sounds like a great deal. Keep in mind, however, that mortgage lenders are in the business of making money and typically charge higher interest rates or closing costs for physician mortgage loans when compared to a conventional loan. Lenders also know that doctors rarely default on their loans and are luring you in as a customer for other lines of business in the future.
Before proceeding with a physician mortgage loan, work with your financial advisor to develop a financial plan and consider all your goals. Just because you’re approved for a certain amount with little money down doesn’t mean you should purchase a home up to the approved limit. You’ll want to decide how much to spend on your new home before starting the mortgage and property search process. You’ll also want to plan for all the other costs applicable to home ownership (i.e. property taxes, homeowner’s insurance, maintenance, utilities, etc.).
Thoroughly evaluate all of your lending options, as what is right for someone else may not be right for you. If you have no money to put down and cash flow is tight, a physician loan may be the best choice. However, if you can fund a down payment of 20 percent, a conventional loan might make more sense. If you can fund a down payment of 10 percent, it may be worth further analyzing which option is best for you. Does it make sense to pay PMI for a while and then refinance once you have 20 percent equity in the home? Is there a family member who would lend you money at a low, reasonable interest rate for a short period of time? Ultimately, whether to utilize a physician mortgage loan, conventional loan or other type of loan depends on many factors, including your personal goals and preferences and how long you plan to live in the home. A qualified financial advisor can help you decide on the best option given your personal financial situation.
Would you like help evaluating your mortgage options? Physician Financial Freedom can help. We are a specialty practice of Creative Planning with dedicated teams that work with doctors. Each of these teams includes an attorney, a CPA and CERTIFIED FINANCIAL PLANNER™ practitioner. Our advisors have experience helping clients evaluate their mortgage options and will work with you to ensure your real estate purchase makes sense given your personal financial situation. For help evaluating your mortgage options, or for any other financial matter, please schedule a call.