Physician Loans: Flexible Mortgage Lending for Doctors
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What is a physician loan?
A physician loan is a mortgage for medical doctors that doesn’t require private mortgage insurance, or PMI, even with a small or no down payment. This could potentially save a borrower hundreds of dollars off a monthly mortgage payment.
A typical physician loan makes allowances for medical school debt and the chronology of a medical career. Dentists are eligible for some physician loan programs.
Who can qualify for one
All physician loan programs are available to medical doctors with M.D. or D.O. degrees. Some include doctors with D.P.M. degrees, and some are available to dentists and orthodontists with D.D.S. or D.M.D. degrees.
Lenders recognize that becoming a doctor or dentist is a multistage process, so the lending criteria vary depending on how far along the borrower is in training and career development. The programs tend to have higher maximum loan amounts for attending physicians than for interns, residents and fellows.
Physician mortgage loans are for buying or refinancing a primary residence. They're not available for buying second or vacation homes. Some lenders may approve a physician loan to buy a two- to four-unit investment property, as long as one of the units is the borrower's primary residence.
How a physician loan works
Doctor loans differ from conventional mortgages in three ways: They don't require PMI, they're flexible with debt-to-income ratios and they accept residency contracts as verification of employment.
PMI: Most mortgages require private or government mortgage insurance for loans with down payments less than 20%. A physician loan is distinctive for not requiring PMI, even with a down payment of less than 20%.
On large loan amounts, PMI can add hundreds of dollars to the monthly payment. By not charging for mortgage insurance, a physician loan frees up that money so it can go toward other obligations, such as medical school loans.
Debt-to-income ratio: When assessing a mortgage application, lenders scrutinize the borrower's debt-to-income ratio, which is the percentage of monthly income that goes toward paying off debts. A borrower with a high debt-to-income ratio, or DTI, is deemed riskier than a borrower with a low DTI.
Doctors, especially early in their careers, would be disadvantaged by lenders' preference for low-DTI borrowers because most doctors graduate from medical school with six-figure debt. During internship and residency, student loan payments can gobble up much of a doctor's income, making it difficult to qualify for a mortgage because of high debt-to-income ratios.
So when calculating DTI, some physician loan programs don't count medical school debt if the payments are deferred or in forbearance for a certain period. This reduces the DTI, making it easier to qualify for the loan.
Employment verification and proof of income: Mortgage lenders typically require borrowers to prove that they're working and earning income. If the loan applicant is about to take a job and about to get paid, that's seldom good enough.
Doctor mortgage loans are an exception. Some allow the borrower to satisfy the employment requirement by showing the employment contract — even before a residency begins. Some programs will lend to borrowers with less than two years of self-employment or work as an independent contractor.
Are physician home loans a good idea?
The main reason to get a physician loan is to make a small down payment without paying for private mortgage insurance.
But if a physician home buyer can comfortably afford a down payment of at least 20%, PMI wouldn’t be required to begin with. In such a case, it makes sense to skip the physician loan and instead get a conventional mortgage or, if the loan amount is larger, a jumbo loan.
Doctors who start their training straight from college spend much of their 20s and into their 30s in medical school, internships, residencies and fellowships. Physician loans can help bring down some of the barriers once they're ready for homeownership.
How to find a physician loan
When getting any type of mortgage, it always pays to shop around, starting with the bank or credit union with which you already have a relationship.
