9 Things Every Dentist & Doctor Should Know About Mortgages

Brew up a great cup of coffee, pull out your notepads, iPads, MacBooks or whatever you prefer to take notes with—this post is epic and contains everything you ever wanted to know about physician loans. More importantly, you’ll find step-by-step information on how to research, compare banks and negotiate to get the best mortgage rates. Let’s go!

1. Physician Loans: A History Lesson

Special mortgage products for doctors are not new, but when you compare them with the modern mortgage market (popularized by insurance companies—not banks—in the 1930’s), they are relatively new products that have yet to make their way into the mainstream.

Sometime in the mid-2000’s, a forward-thinking employee at Bank of America (let’s call him Steve) honed in on an interesting strategy for attracting wealthy—or soon to be wealthy—clients to the bank.

Every single year, over 16,000 fresh-faced medical school grads were being matched to their residency/fellowship programs all over the United States. The majority of these new graduates had massive student loans. In fact, according to the Association of American Medical Colleges, the average medical student in 2015 will amass over $183,000 in debt. That figure is up 2% over 2014. If you look at this situation through a traditional lens, you understand why a recent graduate would never qualify for a traditional mortgage loan: too much debt and zero income history.

Most of these students also emerged into their adult life with the preconceived notion that renting an apartment or home is not a good idea. They would prefer to purchase a home, but can’t. Finally, Steve discovered that MDs have one of the lowest default rates (.02%) of any demographic, so it was relatively safe to lend them money.

That perfect storm created the doctor loan program.

Being an astute strategist and looking to add value to the bottom line, Steve brought this idea to the upper brass at the bank in Charlotte. It took a few months to consider the strategy, vet it out and get it approved. But once implemented, the program was hugely successful. It filled a much-needed void, so the bank generated millions and millions of dollars of new revenue by originating physician loans.

Competing banks took notice. They soon carved out similar doctor loan programs, complete with unique benefits, rates, and states where a resident could purchase a new home.

Now that we understand the history and how we got here, let’s take a look at what these loans look like in general.

2. A physician loan…

Requires you to invest very little money down for a down payment, usually zero to five percent of the total purchase price.

Accepts your residency/fellowship/employment contract as proof of how much money you will be making in the future. Usually, conventional mortgage underwriters look backward at your earning history in efforts to determine if you’ll be able to afford your monthly payment and not default.

Might call on you to open an account with the originating bank. Typically, they’ll need you to set up an auto-draft for your monthly payment, which lowers the risk of default. Forcing you to open an account is also a way for the bank to ensure you’ll be doing business other than your physician loan with them, with the hopes of converting you into a lifetime customer.

May be used by a resident or practicing physician. This is the case at 90% of the banks that offer physician loans. Make sure you inquire as soon as you can about this important distinction.Can be used on most property types (single family and townhomes), but in certain cities and regions, you may not be eligible to purchase a condo with a physician mortgage.

Does not distinguish between a conventional mortgage loan and a jumbo loan. Most banks will charge higher rates and fees on anything over $417,000, which is considered a riskier product, thus the name “jumbo”. A point of note: not all banks that offer the doctor loan program offer jumbo loans.

In some cases, lending guidelines may allow you to use money you receive as a gift for a down payment, cash reserves or miscellaneous closing costs.

Requires you to have decent credit. Typically, you need to be in the neighborhood of 700-720+. If you have scores that are over 800, congratulations. You’re in a different league, and the absolute best rates and terms for physician loans will be available to you.

Mandates that you have a loan payment to income ratio of less than 38%, which means your monthly payment can’t equate to more than 38% of your income. This can vary with lenders, though, and is something you should ask about for when interviewing different banks.

Let’s move on to the other mortgage type so you can easily compare the two.

3. Conventional conforming loans…

Require 3% to 5% down. For reference, 3% of a $200,000 loan would be $6,000. That is just what it takes to get in the door and qualify for the mortgage. This does not include any fees or percentages you’ll pay your Realtor.

Require PMI (private mortgage insurance) if you don’t put 20% down or have 20% equity in the home.

Allow you to qualify with a credit score of 580 or above.

Require three months of cash in reserve that could cover PITI (principal, interest, taxes and insurance) payments on the loan.

Require proof of earnings history (W-2 forms, bank statements, and/or pay stubs). If you’re self-employed, you’ll need to present two years of previous tax returns.

Use any debt (consumer, student, etc.) as factors in your debt-to-income ratios.

Require a debt-to-income ratio of 45% to 55%. This just means your debts can’t equate to more than 45% to 55% of your income.

Allow you to purchase condominiums in most markets.

Here comes the but…keep in mind not all banks can loan in every one of these areas, and each bank’s doctor loan program will be unique in each state. Some banks even vary rates and terms based on the particular city.

Caliber Home Loans makes Doctor loans in all 50 states.

4. These are your options :

There are many alternatives to physician loans. Let’s take a look at the main ones:

Conventional Mortgages – These are your typical mortgages, and encompass anything that isn’t part of a specific government loan or special program. They come in many flavors: 30, 20, 15 and 10 year fixed rate or 5/1, 7/1 and 10/1 adjustable rate mortgages (ARM). If you put at least 20% down, you’ll get a better interest rate and will not have to pay mortgage insurance. This is a good idea if you have the cash.

Many banks offer options for you to pay less than 20% down. The disadvantage of putting less money down are higher rates. If you’re not able to put 20% down, the bank will require you to pay PMI.

As of September 2016, you’ll have to put down at least 3% for this type of loan. Before the 2008 financial meltdown, there were many programs available that offered borrowers 100% financing. Those options have disappeared, many say with good reason.

FHA Loans – These loans are administered and regulated by the Federal Housing Authority. They allow for lower credit scores than conventional loans and require as little as 3.5% down. They also require private mortgage insurance (PMI) on all loans.

VA Loans – This program was created for US Military veterans and are guaranteed by the VA. They do not require a down payment or PMI, but there is an upfront fee (1.5% – 2% depending on your down payment) with most loans.

USDA Loans – Offered to rural, low-income borrowers, these mortgages require zero money down, are often cheaper than going the FHA route. They are sponsored and administered by the US Department of Agriculture and do require PMI.

State and Local Programs – These programs aim to help low to moderate income buyers purchase a home. Some are aimed at certain professions like teachers, firefighters and police officers. You can find out more and see if there is something available for doctors here. The last time I checked, there was not.

5. How to compare banks and their mortgages

It may seem like a daunting task, but putting the time into up-front research is well worth the end result. For example, on a $300,000 30-year fixed rate mortgage, reducing your interest rate by just .25% will save you almost $16,000 in interest payments over the life of your mortgage.

Call Caliber Home Loans who can shop your loan to ensure you get the best mortgage!

6. How mortgage rates are determined by banks

Before we get into negotiating rates, it’s helpful to understand how banks come up with the rates they charge borrowers for their home loans. This is a fascinating, complicated process. It’s not possible to say that interest rates are tied to one particular index, economic factor or governing body. It is possible to say that banks want to be as competitive as possible and at the same time as profitable as possible. This leads to the very strategic game that is determining their rates.

Things that influence rates include: the secondary mortgage market (how much investors are willing to pay for vast tranches—which are packaged bundles—of loans that are packaged up and sold as mortgage-backed securities), inflation rates, the price of US Treasuries, the LIBOR Bank rate and the Federal Reserve funds rate.

7. Finding the perfect home 

There are many guides online that can help you define what will make the perfect home for you. HTGV, Forbes, and Houzz have put together some nice ones. Do this first, because it’s important to narrow your possibilities and focus on homes that fit your criteria.

Once you know what you’re looking for, be prepared to do a lot of virtual house-hunting. Things have changed a lot since your parents drove around with their Realtor to look at every single house they were interested in. Be very glad about that.

8. Buying a house isn’t a good idea for everyone

Let’s be honest. Sometimes, it just makes more sense to rent. If you’re not sure about where you’ll be in three years, rent. If you think you’re in a declining market, and there’s a possibility that home prices will decrease, rent. We’ve come up with a guide to help you weigh these factors: Getting a Physician Loan vs. Renting. The New York Times also put together a great interactive article called Is it Better to Rent or Buy?

In many cases, it makes more sense to buy. From a financial and psychological perspective, the benefits of homeownership are pretty compelling.

If you are saddled with consumer debt and/or excessive student loans, you also might want to pay off some of those debts before purchasing real estate, even with a physician mortgage loan. It all depends on the interest rates and terms. Check out this post on debt from Future Proof M.D. for more info and a few options.

Think about it and choose the path that is right for you.

9. You need to educate yourself

Our physician mortgage loan FAQ will answer more of your burning questions about physician loans specifically, but it’s critical you learn as much as you can about the finance and home buying process. This is the biggest purchase you’ll ever make, and it pays dividends to know what you’re doing. At least know the basics. You’ll probably buy another house in your lifetime, and you can continue to build on your home buying knowledge with every purchase.

Heck. You may even be able to pass this knowledge down to your friends, family or children one day. It’s important stuff.

Please comment below and let me know if there are other things you’d like to know. If you spot any mistakes, point them out, and I’ll correct them.

My best advice to you is to give Bill Rapp, the Mortgage Viking, a call today to discuss the next steps: 281-222-0433.