Physician Mortgage Loans Interest Rate – The physician mortgage loan (sometimes called the physician mortgage loan) was created by banks because of the distinctive challenges that physicians have in borrowing because of their high debt to equity ratios. Income – thanks to student loans. Many doctors struggle to find a conventional mortgage that meets their needs. This is especially true for new doctors who may have a lower salary during residency/fellowship, minimal savings, and student loans that are through the roof. Depending on the amount of debt you’ve taken on (and whether you’ve been consistent in making payments), you may also struggle with a lower-than-average credit score when you start your career. This can translate into higher mortgage interest rates and higher lifetime payments.
Fortunately, there is an alternative to a traditional, conventional mortgage. The doctor mortgage loan is a unique type of home loan specifically for medical professionals. The mortgage can help new doctors lock in low interest rates, avoid a huge down payment (it can be as low as 0%!), and reduce the total amount they have to pay over the life of their loan.
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First, here’s a free flowchart we put together for you: What Issues Should I Consider When Buying a Home [PDF]
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A physician mortgage is a homeowner loan that is only available to qualifying medical professionals. There are fewer restrictions than you might find with conventional mortgages because they are largely dependent on the doctor’s estimated future earnings. For new doctors, this is an attractive concept.
As a resident or your friends, your salary is noticeably lower than it will be in the next few years as an attending. In some cases, lenders will even accept a job offer letter as proof of income. This can have a dramatic impact on your total debt to income ratio in the eyes of a mortgage lender, especially when you’re starting out in your career.
Doctor mortgages have a laundry list of benefits. Let’s go over some of the main benefits you can expect when looking for a mortgage that meets your needs.
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When applying for a conventional mortgage, you must put down a minimum of 20% of the total purchase price to avoid private mortgage insurance (PMI). PMI is a monthly premium placed on top of your total mortgage payment that is intended to protect your lender if you are unable to make payments. If you have a low down payment, you may be considered a “risky” borrower. In these cases, the PMI you pay is a kind of insurance to your lender that they will be covered if you default.
However, with a doctor mortgage loan, you avoid PMI entirely, even with a minimal down payment. In fact, many doctor mortgages do not require any down payment. You can put $0 down and still lock in a low interest rate and beat the PMI – not a bad deal! Of course, if you can, putting some money aside will still reduce your total monthly payment and the interest you pay over the life of your loan. A down payment will also increase equity immediately, which is also a positive. And don’t forget about FHA loans, because they can offer down payments as low as 3.5% with a good credit score. Here is one of our favorite articles comparing FHA vs. conventional loans.
When borrowing a conventional home loan, they often require a DTI ratio of 43% or less. If you are burdened with large medical school loans, staying in this percentage may seem like a distant dream. However, mortgage doctors do not consider your full student loan payment as part of the debt amount they use to calculate your DTI.
That’s right – a doctor’s mortgage loan only counts the total monthly payment you make through an Income Driven Repayment Plan (IDR) as part of your total DTI. Therefore, if your monthly loan payment is relatively low due to a lower starting salary when you apply for your mortgage, your total DTI will be much lower than if you were to use the value of your total loan as part of your calculation.
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With conventional mortgages, the most you can borrow for a conforming loan is between $647,200 in most areas and $970,800 in high-cost areas. Physician mortgages do not have the same loan limit, which can provide more flexibility for physicians and their families. Keep in mind, however, that just because you can borrow more than you can with a conventional loan does not mean you should. Doctors should still seek to borrow within their means (or below) to maximize their salary.
A recent study showed that physician mortgage rates are on par with conventional jumbo mortgage rates. However, this is not always the case. Your interest rate will still depend heavily on your unique financial situation. It can be helpful to look at a doctor mortgage calculator to get an idea of what you can expect.
Finally, the different interest rates of a doctor’s mortgage loan versus a conventional/FHA loan is one of the most vital calculations when comparing your loan options.
A doctor’s mortgage loan may sound like the best-case scenario, especially if you are a relatively new doctor looking to buy a home for your family. However, there are some disadvantages that may affect whether or not you decide to pursue a mortgage doctor for your home buying journey.
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With a conventional mortgage, you can often choose a fixed mortgage rate that makes it easier to predict your mortgage costs for the life of your loan. A doctor’s mortgage loan can come with a variable interest rate. Variable rates can be financially dangerous, especially if you plan to stay in your home for a long time.
Variable rates often add up over time, which could mean you pay more over the life of your loan. You always have the option to refinance in the future, but the variable rates can be sneaky. Your monthly payment can slowly increase without you noticing, and by the time you’re thinking about refinancing, you’re already overpaying.
Another downside to doctor mortgage interest rates is that they are often higher than conventional mortgages. Some conventional mortgages have interest rates of 4.5% or less, and many physician mortgages can be closer to 4.75% or higher (rates as of 4/2022), depending on your unique financial situation. Although the difference may seem minimal, keep in mind that even a small difference in interest rate can have a big impact over time.
Bankrate’s tool is fantastic for comparing the total cost of any new debt. Here’s an example comparing a $500,000 mortgage for 30 years at 4.25% vs. 4.75%; You can see that the “small” .50% lower rate ends up saving you $53,000 over the life of the loan!
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Some lenders will not allow you to take out a doctor’s mortgage on a condo as your primary residence. Likewise, they have limits for rental properties and vacation homes. These types of residences are often associated with higher risk, and lenders set limitations accordingly.
Each lender will have slightly different requirements. Be sure to shop around to see if you meet the requirements for different lenders.
Principal: This is the total amount you took out for your mortgage or the purchase price of your home. A percentage of your total mortgage payment goes toward your mortgage principal each month. Paying off your principal should be your main goal. The faster you can repay your principal, the less you will pay in total interest.
Interest: Depending on your mortgage rate, you will pay a percentage of interest over the life of your loan. The more you pay for your mortgage, the less interest you owe because the total principal amount of your mortgage slowly decreases.
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Taxes and Insurance: Your homeowner’s insurance and property taxes can be rolled into your total monthly mortgage payment. This is called escrow; However, you can also pay the items separately. Make sure you save for the bills because they will be bigger. Be aware that the number may vary from year to year!
HOA Fees (Home Owners Association Fees): Depending on where you buy, you may pay HOA fees as a monthly payment. These will not be part of your mortgage payment, but they are something to keep in mind as part of your total housing costs!
There are a variety of lenders in every state that offer physician mortgages. For more information on realtors and lenders, check out the White Coat Investor resource page for a state-by-state analysis and the doc on NAR.
For many young doctors, a doctor’s mortgage loan seems attractive. They effectively make it possible to buy a home despite high student loan debt and a low starting salary. However, just because you can get a doctor’s mortgage does not necessarily mean you should. For many new doctors, continuing to rent and live below their means can help them increase their savings and net worth in the long run. Renting has several benefits, including:
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Unfortunately, the decision to rent or buy is usually not as clear as choosing the best financial option. Home ownership is an emotional brand
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