Now that you’ve made it through medical school and started residency, you may be thinking about whether you want to stop living like a student and buy a home. You’re probably wondering if that’s even possible with the student loans you’ve accumulated along the way
Doctor loans (also called physician mortgages or medical professionals loans) are specifically aimed at new doctors. They aim to make it easier for new physicians and other medical professionals to qualify for a mortgage, even with a lot of student loan debt.
Doctor loans do this three ways:
- Low-to-zero down payment requirements.
- No private mortgage insurance requirements.
- Flexibility in qualifying with student loan debt.
This mortgage allows new doctors and select other medical professionals to purchase a home when they’re just beginning their careers and may not have a down payment saved yet. And one other thing — this type of loan keeps mortgage payments affordable by eliminating the monthly mortgage insurance premiums that typically come with a low-down-payment loan.
Of all the features of the doctor loan, the best one is that you may qualify with student loan debt — and a lot of it. For traditional mortgages, lenders usually figure in your student loan payments.
The higher your monthly student loan bill, the less the mortgage lender is likely to approve you for. But with a doctor loan, some lenders don’t use student debt at all in qualifying calculations.
If this all sounds too good to be true, read on to learn more details and how to find a doctor loan in your area.
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Finding and Qualifying for a Doctor Loan
Few lenders offer a doctor loan in every single state in the country. That means you’ll have to do a little research to find a loan where you live. (We’ve provided a partial list at the end of this article.)
Many lenders offer online loan applications and processing, which means you’ll only need to confirm they can lend in your state.
You’ll find some variations in the features and qualifying requirements of the loans from different lenders. For instance, some allow you to put down no down payment, while others require you to put down 5% or even 10%.
Some lenders claim to have a doctor loan when in fact their loan doesn’t have all the features of a real doctor loan.
It’s helpful to have a list of the standard conditions found in a true doctor loan, so you can ask the right questions when you talk to lenders offering them.
Here’s a breakdown for you to follow:
Lenders may be willing to loan you a lot of money for a new home. But before you’re tempted to take everything they can offer, start with the most critical question: How much of a home can you actually afford? It helps to create a household budget first.
Make a list of all your expenses and weigh that against your income. You should be able to then see how big of a monthly payment you’ll be able to afford. You’ll also want to weigh factors such as your family size and the cost of real estate in your area.
Then, taking that projected monthly housing payment, calculate your debt-to-income ratio (DTI). Your DTI is your total monthly debt divided by your gross monthly income. Lenders are going to want to see a DTI of no more than 43% to 45%.
The debt calculation includes a future mortgage payment, homeowners insurance premium, property taxes and homeowners association dues if applicable.
Also, car payments, credit card payments, and (in some cases) student loan payments are added to total debts to calculate this ratio.
However, if your student loan is in deferment for at least 12 months before the mortgage closes, the student loan payment is excluded from the calculation, making it easier to qualify.
If your DTI calculation is coming out too high, you may need to scale down your borrowing expectations.
Whether the lender you work with offers doctor loans as big as $2 million or caps the loan size at $750,000, focus on what you can personally afford versus the maximum you can borrow. When you’re comfortable with your budget, then consider the down payment options.
How much you’ll be required to put down varies depending on your lender. Many allow 0% down, while others require up to 10% of the purchase price as a down payment.
The variation occurs in different regions of the country. East Coast lenders offer more 0%-down options, with higher loan amounts.
If the lender you choose requires a down payment but you haven’t accumulated enough savings, consider gift funds from family members. In fact, if you haven’t saved anything at all, the entire down payment can come from a gift.
When mortgage lenders look at your application, one of the main things they want to see is that you’ll be able to repay the loan.
That’s why they consider your income and how much other debt you’re already obligated to repay. They don’t want you saddled with so much debt that you can’t repay your mortgage.
One flexible feature of doctor loans is the ability to get a mortgage before you receive your first paycheck — or even start your residency. Lenders know that you’re heading into a high-paying career.
If you have a signed employment agreement, you can qualify and close your purchase up to 60 days before you start your new job. If you’re already a doctor, you must have a contract that guarantees income for one full year.
Bonus income can be included as long as you’ve already received it for a full year. And if you’re starting your own practice, you’ll have to have filed business tax returns for two years before you can qualify.
As mentioned before, you’ll also need to meet a maximum of 43%-45% total DTI (lenders vary). Some lenders include student loan payments in your DTI for a doctor loan, others don’t.
Addressing the status of your student loan repayment with your lender is your first priority in the loan process. Be prepared to document it fully.
Mortgage Insurance Premiums
The elimination of mortgage insurance premiums is another excellent feature of doctor loans. Traditionally, with a down payment of less than 20% of the purchase price, the lender requires private mortgage insurance, which pays them if a borrower defaults on the loan.
Home buyers need to pay the monthly premium on the policy until they have at least 20% equity in their home.
Paying mortgage insurance premiums up to several hundred dollars reduces the amount a borrower can qualify for by negatively impacting their debt-to-income ratio. But for doctors, the situation is different.
Without a monthly premium on top of mortgage payments, doctors can afford larger loans.
Other Important Features
Your credit score will be an important part of qualifying for a doctor loan. You’ll need a minimum score of 700, but note that interest rates improve with higher scores. Check lenders’ requirements for minimum credit score first thing.
Your payment history with car loans and credit cards is the most important factor in your credit score. If you don’t have any credit history, there are ways to build it over time. One of them is to get a credit card and make payments on time for six months to a year. Another is to get a credit-builder loan.
Your rental history is important to your lender, too. It will need to be verified through your landlord but isn’t required before preliminary approval, giving you time to notify your landlord that you’re planning on moving.
Things NOT required with doctor loans:
- Reserves. For traditional loans, lenders often require borrowers to have six to 12 months’ worth of the full mortgage payment left over in savings after making the down payment and paying all closing costs.
- Reserves for other properties you may own. This is also something lenders often require of borrower for traditional loans.
Things that ARE required with doctor loans:
- U.S. citizenship or a valid green card. *Non-permanent resident aliens aren’t eligible for doctor loans.
- A valid Social Security number.
- Established employment in the U.S.
You ARE eligible for a doctor loan if you are a:
- Licensed medical doctor (MD and DO)
- Hospital administrator with an active medical license.
- Medical student within 60 days of starting residency.
- Doctor who has finished their residency or fellowship within the last 10 years, and who are relocating for a new job or relocating and building their own practice in a new city.
Property and Loan Type
You won’t be able to buy an investment property with a doctor loan, nor can you purchase a manufactured home or mobile home.
Properties that are eligible are single-family homes (no construction-to-permanent), attached townhomes and one-unit homes in planned unit developments, and condominiums.
Most lenders offer a 15-year fixed rate loan as well as a variety of adjustable rate mortgages. A limited number also offer a 30-year fixed option.
15-year vs. 30-year
Should you choose the 15-year fixed rate over the 30-year fixed (if a 30-year loan is available)? The 15-year loan will be harder to qualify for. It must be paid within half the time of a 30-year mortgage, so the monthly payments will be substantially higher.
For instance, for a $600,000 loan at 4.5%, your monthly would be $3,040 over 30 years, or $4,590 over 15 years. That’s $1,550 more per month for the 15-year mortgage.
Will you be able to afford that much every month? The answer will impact your ability to get approved for a loan. The lower payment is easier to qualify for.
However, with a 15-year mortgage, you’ll likely have a lower interest rate. That could save you tens of thousands of dollars over the life of the loan.
The other loan type available is an adjustable rate mortgage (ARM). For doctor loans, you have more options for ARMs than fixed-rate loans. An ARM has a fixed interest rate for a period of time, and then the interest rate can adjust every year.
The amount that the rate changes is based on an index. For most ARMs, the index is the average Treasury rate, COFI, or Libor.
Why would you want to get an ARM at at time when interest rates are rising, as they are now? The benefit of an ARM is that during its initial period, the rate is often lower than the typical rate for a fixed-rate mortgage.
You could take advantage of that low rate and then do one of the following before the variable rate kicks in: sell, refinance to a fixed-rate loan or pay off the mortgage in full.
Rates and Fees for Doctor Loans vs. Traditional Mortgages
Interest rates for doctor loans are slightly higher than for a borrower who can put 20% down and qualify with their full student loan debt payments (someone who doesn’t need the unique guidelines of a doctor loan.)
On the other hand, even with a higher interest rate, your monthly payment will likely be less than it would be with a lower interest rate and monthly mortgage insurance premiums.
Fees are the same for both types of loans, so your closing costs will be equal no matter which type you choose.
Where Do I Find a Doctor Loan?
First, you can usually access a doctor loan by working with a mortgage broker. Your real estate agent can give you a good recommendation for a broker in your area. Also, Fairway Independent Mortgage offers access to doctor loans, as do other mortgage banks.
At the time of writing, these banks currently offer doctor loans, although not in every state: Arvest, BB&T, Bank of America, Fulton Mortgage Company, Huntington Bank, Fifth Third, CenterState, TIAA, Citizens Bank, First National Bank of Pennsylvania, First Financial, Simmons, BMO Harris, SunTrust Mortgage, First Federal Lakewood, and KeyBank.