Physician Mortgage Loan
Many doctors are familiar with the physician mortgage loan, sometimes referred to as the doctor loan. Physician loans are a type of mortgage that enables physicians to make a down payment of less than 20% and avoid paying for private mortgage insurance (PMI). There are numerous banks that offer physician home loans. Some of them are national, others are regional. In each state, there are at least several banks that have a doctor mortgage loan program. This page will give an overview of doctor home loans and things to be aware of when inquiring about a bank’s doctor loan program.
For the general population, a conventional mortgage is the typical type of loan people pursue. A common requirement that most people have heard is that you need to have a 20% down payment to buy a house. Depending on the type of property you are purchasing (house, condo, etc.), this may not be entirely true. Yes, if you have a 20% down payment, your options are plentiful. However, most banks will allow borrowers to put less than 20% down and still secure financing. The catch is, they require you to pay an extra monthly fee to cover the cost of private mortgage insurance, or PMI.
What is Private Mortgage Insurance (PMI)
Private mortgage insurance is insurance that you purchase to cover the mortgage loan balance in the event you default on your loan. This became prominent in the wake of financial regulations after the 2008 housing debacle. Most lenders automatically include PMI in loans where the down payment is less than 20% of the purchase price. PMI typically costs an additional $100-300/month and is added into the loan package and usually paid through the escrow account. Sometimes it is built into the loan itself and doesn’t show up as an additional line item.
In order to remove PMI from the loan, the loan-to-value ratio on the home needs to be under 80%. For example, if a home was purchased for $400,000 with a 10% down payment, the original mortgage taken out was $360,000. Over a handful of years, the home hypothetically appreciates to $450,000 and the loan balance is paid down to $340,000. At this point the loan to value ratio is 75.5%, so the borrower would be eligible to remove the PMI cost from their loan. Usually a home appraisal (at the borrower’s expense) is required to prove to the bank the current home value. If the PMI is built into the loan itself, then a refinance will be required to get the PMI removed from the equation. Because of this, if you are considering a loan that will require PMI, it is best to have the PMI as a separate line item, so it can be removed with an appraisal, rather than a refinance.
Home Loans for Doctors
Banks recognize that physicians are unique compared to the general public and are attractive borrowers. They have job security, earn nice incomes, and pay their loans on time and in full. As a result, some banks offer a special physician mortgage loan to attract physicians as customers. As mentioned earlier, physician loans enable doctors to secure a mortgage without PMI, even if they are making a down payment of less than 20%.
The target market for these types of loans are physicians who have recently entered practice. A doctor who went from making $60,000/year in their last year of residency to $300,000/year overnight, has the ability to comfortably afford the monthly payments on a $600,000 mortgage. However, they likely haven’t saved up the $120,000 needed for a 20% down payment. The banks who offer a doctor loan program have identified this issue and created a solution for it. Now, a young doctor can buy the house they want with as little as zero percent down (depending in the doctor mortgage loan program) and not have to pay for mortgage insurance!
Full disclosure, zero percent down is only offered by a select few regional banks and is not available in all states. A typical physician loan program will require 5% down for loans under $750,000 (some will go up to $1,000,000) and 10% down above those thresholds. Once you get above $1.5M, most banks will require more than 10% down on a doctor mortgage loan to avoid PMI.
Questions to Ask When Exploring Physician Loans
Most doctors think they can ask any bank if the bank has a doctor home loan program and assume the bank knows what they are referring to. When faced with that question, most mortgage loan officers will reply with, “Of course we offer doctor home loans.” They assume you are simply asking if they offer mortgages for doctors, just like they offer mortgages for engineers, schoolteachers, and firefighters. In that scenario, the “doctor loan” will likely be the same as any other conventional mortgage with less than 20% down and include PMI.
Instead of asking if a bank offers a physician mortgage loan, the question needs to be phrased appropriately. You could ask, “Do you offer physician home loans that waive the PMI requirement on loans for doctors with less than a 20% down payment?” If they do, you can proceed to asking them about the various requirements.
“What is the minimum credit score needed for your physician loan program?”
“On your physician mortgage loan, what are the minimum down payment requirements for various loan sizes?” This is where you will find out the maximum loan size if you are putting down 5%, 10%, etc.
Keep in mind, the individual human you are working with is arguably more important than the bank itself. If you are working with someone at a bank that offers physician loans, but the person isn’t familiar with their doctor loan program, it probably won’t go well for you. It is helpful to find a loan officer who specializes in physician home loans with no PMI.
Other Thoughts on Physician Home Loans
Some banks who offer a doctor home loans will have different parameters for residents/fellows compared to doctors in practice. Also, some banks restrict their no PMI physician home loans to doctors within the first decade of their attending career. The thought here is after ten years in practice, a physician should be able to save up enough for a 20% down payment. Also, you typically cannot use a doctor loan on a vacation home or investment property. The physician loan program is designed for one’s primary residence only.
For more questions or to consult with one of our financial advisors about home loans for doctors, please fill out the contact form below.