3 Reasons to Avoid a Physician’s Mortgage Loan

What is a Physician’s Mortgage Loan?

There are 3 reasons to avoid a physician’s loan.  However, what is a physician’s mortgage loan?  A physician’s mortgage loan is a lending product that offers many features that other home mortgage loans do not.

The first feature is 100% financing up to $1,000,000.  The lowest minimum down payment in the market is an FHA loan with 3.5%.  However, a person must have an almost perfect credit score and an extremely low debt to income ratio to qualify.  New physicians might find this hard to achieve with the amount of student loan debt.

The second feature is NO Private Mortgage Insurance or PMI.  PMI is insurance for the MORTGAGE COMPANY that covers them if an individual does not repay the loan.  If less than 20% is not deposited as a down payment on a standard FHA or conventional loan, the loan has PMI added to it.  Essentially, a mortgagee pays for the mortgage company to become whole if the individual decides not to pay.  YUCK! 

Premiums can be expensive, ranging between .2 – 2.00%, depending on creditworthiness.  Then, it gets multiplied by the loan balance, which means the higher the balance, the higher the monthly premium.  Physicians begin their careers much later than the typical workforce.  They did not have time to save money for a down payment.  Thus, making a physician’s mortgage look more attractive.

The third feature is that a physician can have a higher debt to income ratio.  Usually, physicians have high debt from medical school, which can negatively impact them when trying to qualify for a standard mortgage loan.  High student loans will not adversely impact getting a mortgage with a signed contract or working as a physician.

Who qualifies for a physician’s loan?

A normal mortgagee is a medical resident, fellow, or attending physician with a signed contract for employment.  Some lenders also include dentists, veterinarians, and other doctors.

What credit score do you need for a doctor loan?  

The credit score is very high for people who just got out of medical school and have a high debt to income ratio.  The average credit score to qualify for a physician’s mortgage is 700+.  Mortgage companies want to know that if they give $1,000,000 to a physician, the physician has a high probability of paying it back.

What is the Rate of a Physician Mortgage Loan?

Rates are usually more than a conventional mortgage but equal to jumbo loan mortgages.  A jumbo mortgage is a loan over the loan balance of $548,250 for most of the United States.  The rates can be anywhere from an additional .25% to .75%.  When looking into multiple mortgage products, use the site below to compare how much interest expense you would pay over the life of the loan.

https://www.bankrate.com/calculators/managing-debt/annual-percentage-rate-calculator.aspx 

 

Which Option Should You Choose? 

If you are in the military, especially disabled, the VA Mortgage can be a solid option.

Assuming you are not in the military, a good measure you should base the decision on is how long you plan to own the home and how much you plan to pay on the mortgage.  See the different periods below to determine which is best for you.

  • 0-5 years– If you don’t foresee yourself living in the home for at least five years, the Physician Mortgage Loan is often your best option.  However, if you plan on living in it for fewer than five years, renting should be highly considered.
  • 5+ Years – Unless you can get a Physician Mortgage Loan with a 30-year fixed-rate (if you can find one), it is not advisable. It would be best to reevaluate this once you have 20% equity.   Once you fit the profile, you can often refinance into a new, non-physician mortgage that’s more competitive.

Are Physician Mortgage Loans Worth it?

A great question!  An example below helps you compare if you do not have the cash to put down on a loan versus waiting until you have your down payment.

The comparison is a physician mortgage to a conventional mortgage, where you put 20% down.  We will not include closing costs (they typically are equal).  The example is organized to have the same payment regardless of the physician’s or conventional mortgage.  The difference is the down payment and the interest rate.

$0 down looks tempting from a short-term perspective.  You might not have the cash available, or you think you could invest the down payment and earn a higher return in the market.  Also, 4.25% is still an excellent rate and not much different from 4%.  But how does it compare from a long-term perspective?

The total lifetime interest costs:

Conventional Loan – $141,826

Physician’s Loan – $308,393 

 

3 Reasons to Avoid a Physician’s Mortgage Loan

  1. It is exceedingly rare that a fixed-rate physician loan gets offered. Most physician mortgage loans are on an adjustable-rate basis.  Over the past few years, this has looked like an appealing rate since mortgage rates declined with the COVID-19 pandemic.  However, the Federal Reserve will be raising short-term interest rates 5-7 times in 2022.  The interest rate increase will push mortgage rates higher.  Over the past three months, mortgage rates have risen 1%.  Furthermore, a mortgage rate of 4% today could be 5% when it adjusts in the future.
  1. A physician’s loan can only get borrowed for a primary residence. You cannot get this type of loan on a rental property or a second home you own.  Also, condos and townhomes usually do not qualify.
  1. The risk of buying too much home can be seductive when receiving 100% financing. By owning too much home, you risk overpaying for unnecessary space.  Also, if the value of the home decreases, you are at risk of being underwater on your home.  Being overleveraged on a home can have financial and psychological consequences on your career and family.  You must develop a budget to make sure you can afford the home, plus pay for any student loans you might have.

 

Conclusion

It depends on the different goals that you have in your life.  Some might say that the physician’s mortgage is an excellent short-term way to get into a home.  However, the 3 reasons to avoid a physician’s loan show the long-term consequences.  The good news is that you can refinance a physician’s loan to a conventional loan.  It does not make much sense to do this until you have 20% down.

Also, whether it is a conventional loan or a physician’s loan, the closing costs are generally the same.  However, the rate is almost always higher with a physician’s loan and is usually adjustable.  Currently, lenders will raise mortgage rates and keep doing so as the Federal Reserve continues hiking short-term interest rates.  Remember, renting is not a bad thing.  It is a great way to save the 20% down payment and get a mortgage with a lower interest rate.

 

About The Author

Jordan Benold, CFP® provides fee-only financial planning and investment management services in Frisco, TX.  Benold Financial Planning serves clients as a fiduciary and never earns a commission or sells a product.  Jordan has over 3 years of experience as a financial advisor in Frisco.

 

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