Physician Mortgage Loans: A Guide for Doctors
After years of studying to begin a career as a medical professional, you’d think getting a mortgage would be a breeze. Unfortunately, many doctors come out of medical school with a significant amount of debt and a more modest income than seasoned physicians.
This large debt-to-income (DTI) ratio can make it harder for doctors looking for a new home to secure a conventional mortgage.
However, there’s a mortgage option specifically designed for doctors. If you’re a doctor facing a tough housing market with a lot of medical school debt, using a physician mortgage loan is likely your best option.
Learn everything you need to know about physician mortgage loans, how they work, how to apply for one and what kind of rates and terms to expect.
What Is a Physician Mortgage Loan?
A physician mortgage loan (also known as a “doctor loan”) is a type of mortgage that, in most cases, doesn’t require a down payment. As the name implies, these loans are meant for doctors who’ve either just graduated – and may not have proof of employment yet – and newer physicians.
With high medical school debt and possibly no immediate income, newer doctors have a way to qualify for mortgages without having to put down thousands of dollars upfront.
Are physician loans conventional?
No, physician loans are not conventional. They’re unique to doctors and don’t offer the same terms and requirements as conventional mortgages.
A physician mortgage loan makes it possible for recent med school grads to achieve homeownership sooner than with a conventional mortgage. This is largely due to lenient application requirements and the ability to put no money down.
How Do Physician Mortgage Loans Work?
Doctor loans work differently than conventional home loans. There are degree requirements, lower loan qualifications and potentially higher interest rates for doctor loans than conventional mortgages.
In the sections below, you’ll learn exactly how a physician mortgage loan works.
Like traditional mortgages, exact costs vary by provider. However, $1 million is the industry standard for how much doctors can borrow without a down payment. Properties with a higher purchase price may require a down payment – even if you’re using a physician mortgage loan.
You can also choose to make a down payment to increase your approval odds and lower the long-term costs of your loan. Some of these costs include:
- Monthly payment: This amount goes toward the principal amount and interest of your loan. It may also cover additional home costs, like taxes and homeowner association (HOA) fees.
- Closing costs: Every home buyer has to pay closing costs. These are expenses associated with finishing a real estate transaction. You can expect to pay 3% – 6% of the loan balance.
- Earnest money: Also known as a “good faith deposit,” this shows the seller you’re serious about buying the home. Earnest money can also incentivize the seller to schedule the necessary inspections and speed up the closing process.
Most doctor loans are adjustable-rate mortgages (ARM), which means they tend to have lower interest rates at the beginning of the loan. The interest rate can change over time based on market conditions and your personal credit.
With physician mortgage loans, the rate tends to increase over time. But this isn’t always the case.
Your lender can’t increase your interest rates without limitations. There are various caps on adjustable rates to ensure lenders don’t use these mortgages to take advantage of borrowers.
So do doctors get better mortgage rates? No – at least not with a physician mortgage loan.
In fact, interest rates for doctor loans are, on average, higher than the fixed rate available with conventional mortgages. Even with a doctor loan, you should always shop around to find the best loan terms.
Private mortgage insurance (PMI)
If you take out a traditional mortgage and make a down payment of less than 20% of the loan, your lender will usually require you to get Private Mortgage Insurance (PMI).
The cost of PMI is added to your monthly payments and varies based on the size of the loan.
However, if you get a physician mortgage loan, you can put down less than 20% (even 0%) and waive private mortgage insurance goodbye!
Doctor loans have strict property requirements compared to traditional mortgages. Most notably, you can only use a physician mortgage loan to buy a primary residence. In other words, you can’t get a doctor loan to pay for a second home or investment property.
Additionally, your lender may put restrictions on the type of property you can buy with the loan. Many doctor loans won’t allow you to buy condos, townhomes or multifamily properties.
You’ll need to check with your lender to see what types of properties are accepted.
Who Is Eligible for a Physician Mortgage Loan?
Contrary to popular belief, doctor loans aren’t just for doctors and other medical professionals. They’re available to a wide range of high-earning professions, including but not limited to:
- Certified Public Accountants
- Advanced Practice Clinicians
Keep in mind that not all lenders offer doctor loans to home buyers who work outside of the medical field. They’re generally reserved for medical professionals only. However, if you have the right credentials, you could find a lender that will accept your application.
Qualification requirements for physician home loans
As mentioned above, there are many professions who can qualify. Even if you don’t have a medical degree, you should consult with one or more lenders to see if you can get a physician mortgage loan.
That said, you’ll still need to show evidence of the following:
- Degree: You’ll need to show proof of an advanced degree in a qualifying field of study, including but not limited to MD, MO, DVP, DVM, DDS and DMD. Remember that eligibility requirements, including accepted professions and degrees, vary from one lender to another.
- Employment or income: If you’re right out of med school, you can generally qualify for a doctor loan without proof of employment or income. If you’ve been out of school for more than a year, your lender will likely want to see that you have some way to make your mortgage payments.
- Debt-to-income (DTI) ratio: You’ll need to show how much debt you have in comparison to your current income. Fortunately, even if you have a lot of medical school debt and little or no income, many lenders will still accept your application. Doctor loans don’t automatically disqualify borrowers with high student loan debt.
What credit score do you need for a physician mortgage loan?
Credit requirements vary significantly by lender. As a general rule, 620 is the lowest score you can have to qualify for a non-government-backed mortgage. The same rule applies to doctor loans.
However, if you don’t plan to make a down payment, your lender may require a credit score of 680 or above.
Are Physician Mortgage Loans a Good Idea?
Even if you’re a recent grad or a new doctor with a lot of debt, you may not want to rush into a physician mortgage loan. It all depends on your specific circumstances and goals.
Below are some important pros and cons of doctor loans to help you decide if they’re the right choice for you:
You won’t have to add extra insurance costs to your monthly mortgage payment, even if you’re paying less than 20% of the loan upfront.
✅No down payment required
A doctor loan ensures you can still get into a home, even if you don’t have enough cash to make a down payment.
✅Flexible DTI and employment requirements
With a physician mortgage loan, it’s understood that recent med school grads likely have a lot of student debt and little to no income.
✅Larger loan limits
Getting a loan limit of $1 million without a down payment or proof of income isn’t something you can do with a conventional mortgage.
⛔Adjustable rate (not fixed rate)
Your interest rates will fluctuate and likely increase over time, making it harder to plan your financial future.
⛔Higher interest rates than conventional mortgage
Even though your adjusted rate will start lower, you’ll probably end up paying more in interest with a doctor loan.
⛔Risk of going underwater
Both you and the lender are taking on more risk with a doctor loan. The assumption is that you’ll find employment. But if that doesn’t happen quickly enough, you could find yourself drowning in debt.
⛔Limits on qualifying properties
You can only get a physician mortgage loan for a primary residence, and your lender may put additional limitations on the type of property you can purchase.
Alternatives to Physician Mortgage Loans
If you decide a physician mortgage loan isn’t the best choice for you, there are other loan options.
It’s important to remember that physician mortgage loans are specifically designed for new doctors and med school grads who wouldn’t qualify for a conventional mortgage.
If you fall into one of these categories, you may find it difficult to qualify for other loans.
Federal Housing Administration (FHA) loan
An FHA loan is a government-backed mortgage that helps people with lower credit scores or limited savings get access to home financing.
To qualify for the reduced down payment of 3.5%, you’ll need a credit score of at least 580. Alternatively, you can qualify for a down payment of 10% – if your score is above 500.
You’ll also need to show proof of employment and income, pay for PMI and have a DTI ratio of less than 43%. FHA loans are great options for borrowers who don’t want a doctor loan and don’t qualify for a conventional mortgage.
A conventional loan is offered through a private lender and offers competitive terms and rates based on your qualifications.
Most conventional mortgages require you to have good credit and a steady income The upside is you can get virtually any kind of property with a conventional loan (second home, investment property, etc).
You’ll also be expected to make a down payment of 20%. If you can’t, you’ll pay for PMI.
Assuming you have a high DTI ratio due to med school loans, you probably won’t qualify for a conventional loan. Even if you do qualify, the terms won’t be very favorable.
Fortunately, you can turn to a low down payment loan program like Fannie Mae Home Ready or Freddie Mac Home Possible for help with the upfront costs.
Department of Veterans Affairs (VA) loan
Lastly, if you’re a military veteran or a current member of the military, you may qualify for a VA loan. This type of loan gives veterans and military families access to mortgages with no down payments.
However, you’ll have to pay the funding fee (a fee that helps fund the VA loan program) of approximately 2.3% of the loan amount.
Like a doctor loan, you can only use a VA loan to buy a primary residence – with some exceptions if the military relocates you. Generally, VA loans are a good option if you don’t qualify for conventional loans.
You have to be a current or former member of the U.S. military to qualify.
Doctor up Home Buying With a Physician Mortgage Loan
If you’re a recent med school grad with student loan debt, a physician mortgage loan is one of the best home financing options on the market.
In some cases, it may be the only way for new doctors to become homeowners right now. Just remember to weigh all of your options to see if a physician mortgage loan makes sense for you.