What is a physician mortgage loan, and are they only for doctors, or other HCPs?
A physician mortgage loan is a specialized home loan designed for doctors and other healthcare professionals, including CRNAs, dentists, veterinarians, and podiatrists. Many banks also extend eligibility to attorneys and accountants. These loans have unique qualifying criteria and terms compared to standard mortgage loans. They aim to help physicians who typically have high debt and low savings at the start of their careers by offering alternative mortgage options.
Why would a doctor consider one? What are the benefits?
Doctors might consider physician mortgage loans because their unique financial circumstances often make it difficult to qualify for traditional loans. The benefits of these loans can be divided into requirement benefits and term benefits.
Some of the qualifying requirement benefits include 1) no down payment requirement, 2) higher debt-to-income ratio limits, and 3) special treatment of student loan debt. Typically, a debt-to-income ratio is calculated by dividing a buyer’s monthly debt payments by their monthly gross income. Conventional loans usually require this ratio to be 43% or less. Depending on the lender, some may allow a debt-to-income ratio up to 45% and exclude student loans from the calculation. This can significantly help many early-career physicians and healthcare professionals. Additionally, lenders often allow you to close on a home 1-3 months before starting your employment.
Some of the term benefits include 1) waiver of private mortgage insurance (PMI) requirements and 2) higher loan amount limits. In 2024, a conforming conventional loan is limited to $766,550 in most areas and $1,149,825 in high-cost areas to meet Fannie Mae and Freddie Mac guidelines. In contrast, physician loans do not have these borrowing caps, which means you can borrow higher amounts.
What are the risks/downsides?
Some of the disadvantages of physician mortgage loans are that they can only be used for primary residences, excluding second homes and investment properties, and are typically limited to single-family houses, excluding condominiums and townhomes. Additionally, these loans may come with higher interest rates compared to traditional mortgages. This is a significant risk; variable rates can increase over the life of the loan, which can lead to a corresponding rise in debt repayment amounts. Even small differences in interest rates, when applied to large loan amounts, can accumulate to substantial sums.
Do you recommend these to people? If so, who is the “perfect” candidate?
We generally recommend physician mortgage loans to our clients if they meet a couple of prerequisites. It usually makes the most sense if they plan on living in the primary residence for at least 3-5 years, or preferably even longer. This duration helps mitigate the risk of selling with negative equity, which occurs when one owes more than the home’s value. For early career physicians, who often change positions more frequently, we emphasize the importance of maintaining location flexibility to secure the best career opportunities. These clients should consider renting first to ensure they like the area, fit well with the practice, and have time to find the right neighborhood.
However, many of our clients already know they want to practice in a specific location due to family, friends, lifestyle considerations, etc. In such cases, buying with a physician mortgage loan might be more sensible than renting.
Lastly, we always aim to prevent clients from experiencing cash flow problems. We advise them on budgeting and the optimal amounts to spend on home mortgages to ensure they have sufficient inflows to handle an adjustable-rate physician mortgage and related living expenses.
How can doctors watch out for scams around these types of loans–what would some red flags be? Conversely, what are some reputable places to find one?
As with all loans, it’s crucial to fully understand the terms and make direct comparisons between lenders. There is considerable variation in these products, and finding the loan that best fits a buyer’s needs is essential. We typically recommend loans from reputable national or community banks, as we’ve found that community banks are often more flexible in meeting clients’ needs. These banks are frequently willing to extend these loans to those in residency or fellowship, recognizing the unique financial situations of early-career medical professionals.
In your experience do most doctors know about this option? Why/why not?
We believe that many physicians are aware of physician mortgage loans, but in our experience, they often do not fully grasp the details, benefits, or drawbacks of these loans. It’s similar to many personal finance issues where people generally know what they should do but lack the specifics on how to achieve it. Trusted financial advisors, bankers, and resources like Medscape can be extremely valuable in helping buyers save time and money by providing clear guidance and insights.
Anything else to add so doctors can decide if it’s right for them?
For any loan product, we always advise checking your personal credit score and working to improve it before applying. A better credit score can significantly impact the interest rates lenders offer. Typically, once you reach the high 700s, you qualify for the best rates, so it isn’t necessary for you to reach a perfect score of 850!
In 2024, the maximum limit for conforming conventional loans is $766,550 in most areas and $1,149,825 in high-cost areas, according to the guidelines set by Fannie Mae and Freddie Mac.
Why would there be borrowing caps? Don’t banks just make their own judgment on how much to lend? What are Fannie Mae and Freddie Mac conditions?
Fannie Mae and Freddie Mac play crucial roles in the housing market, including setting the terms and conditions for conventional loans. This helps maintain stability and liquidity by allowing these loans to be traded in the secondary market. Their guidelines also reduce risks for Fannie Mae, Freddie Mac, and investors, as these agencies bundle mortgages into mortgage-backed securities that are then sold to investors.
The conforming loan limit varies by county. According to the Housing and Economic Recovery Act (HERA) of 2008, the maximum loan limit is set at 150% of the baseline to reflect changes in the housing market and the level of risk these quasi-governmental agencies are willing to accept. For 2024, the baseline conforming loan limit is $766,550, and in high-cost areas, it is $1,149,825.
Loans that exceed the limits set by Fannie Mae and Freddie Mac are classified as jumbo loans. These have different terms and conditions determined by private banks and investors, rather than Fannie and Freddie. As a result, jumbo loans typically carry higher risks and have terms and conditions that reflect these larger loan amounts and associated risks. Fannie Mae and Freddie Mac do not purchase these mortgages because of the elevated risk.
Disclaimer: This blog post is for educational and informational purposes only, and is not meant as individualized financial or legal advice. We recommend you consult with a financial advisor or attorney for personalized guidance based on your specific financial circumstances and local laws before taking action.