On the surface, physician mortgage loans are great! No money down. No jumbo limits. No PMI. But let’s be real. Lenders are in business to make money. So how do they stack up against everything else that’s available? Are they really as good as they sound?

You’ve made a solid decision around how much to spend on your home and you have your financial ducks in a row. Now it’s about deciding between physician mortgage loans or some other alternative to finance your home.

We’ll cover the following…

    – How Physician Mortgage Loans Work
    – Alternatives And How They Compare
    – Deciding On The Best Mortgage For You

Physician Mortgage Loans

Physicians are extremely profitable lending customers. You take out big loans early in your career and almost always pay them off. Lenders use physician mortgage loans to lock in early-career physicians by lending them more money with less stipulations than their competitors. It’s marketed as a “special program” just for physicians.

The goal is to “get you in the door” and sell you other stuff down the road as your needs change. A medical student transitioning into residency with zero earnings history, no cash and a boat load of student loans would normally never qualify for a mortgage if it wasn’t for physician mortgage loans. However, there’s no such thing as a free lunch. These loans commonly end up being more expensive than alternatives.

What’s So Special?

So how is the physician’s mortgage loan different than normal mortgages? Here are some of the common features:

  • Zero or very low down payment required
  • No private mortgage insurance “PMI”
  • No rate increases on jumbo loans (typically loans larger than $417K)
  • Lend based on a physician’s signed employment contract
  • Less critical of student loan debt

Who’s A Qualified Borrower

A “qualified borrower” is normally a medical resident, fellow or attending physician with a signed contract for employment. Some lenders also include dentists, veterinarians, and other doctors.

Physician Mortgage Loans – Lenders

There’s a growing list of lenders offering physician mortgage loans. Here’s our list (if you’re a lender and would like to be added, please let us know. We do not have any financial relationship with any of these lenders.):

    Fifth Third Bank
    Republic Bank
    BB&T
    Huntington Bank
    – Bank of America
    – Regions Bank
    Citizens Bank
    SunTrust Bank
    – Bank of Nashville
    Physician Loans

Mortgages Expenses:

  • Interest – the cost of interest is based upon the interest rate, loan balance and loan repayment term
  • Closing costs – a one-time out of pocket expense paid at closing, wrapped into the loan balance or wrapped into the loan in the form of a higher interest rate
  • PMI – the monthly fee typically paid until reaching 20% equity

Closing costs and interest rates are kind of like a teeter totter: if you want to reduce closing costs on a mortgage, the rate must increase. Or if you want the lowest rate possible, it’s going to require higher closing costs. You can see how this works in the example breakdown below from the mortgage professor website.

Pic 1

With PMI, you either have it or you don’t. It’s typically going to cost around 0.3% to 1.5% of the original loan amount per year. A surefire way to avoid PMI is to put 20% down. Or some loans, like the physician mortgage loan, allow you to avoid PMI even though you don’t have 20% equity.

Another way to avoid PMI is to get two mortgages. One that finances 80% of the deal and the second that covers the remaining debt (up to 20%). All of these PMI avoidance tactics come with additional costs that should be considered.

Rates and Costs

Let’s assume you’re a physician considering a $500,000 home. You have fantastic credit but no cash for a down payment. What are your options for no PMI mortgages? Here are the most popular:

  • Physician Mortgage Loans: 30 yr fixed rate – 4%
  • Physician Mortgage Loans: 7/1 ARM – 3.25%
  • Conventional 80/20:
  • -First mortgage (80%) – 30 yr fixed – 3.5%
    -Second mortgage (20%) – Interest only HELOC (prime + .5% or 4% today)

  • VA Mortgage (must be military): 30 yr fixed rate – 3.25%

Which Option Should you Choose?

For the military, the VA Mortgage is typically a home run especially if you’re considered disabled. Physician mortgage loans have the highest interest rate but it’s locked in. The ARM has a better rate than the 30-year physician mortgage but the rate becomes variable after 7 years. The conventional 80/20 offers the best rate on the primary but the second mortgage has a variable rate.

Assuming you’re not in the military, this decision should be based upon how long you’ll own the home and how much you plan to pay on the mortgage. Let’s break it down by time horizon:

  • 0-7 years – The Physician Mortgage Loan 7/1 ARM (and in reality, you should be renting if your time horizon is less than 5 years).
  • 7+ Years (and average income and savings) – The Physician Mortgage Loan 30-year. This should be revisited when you have 20% equity, you drop below the jumbo limits, or if rates in general drop. Often you can refinance into a new non-physician loan that’s much more competitive once you fit the profile.
  • 7+ Years (and ability to pay the HELOC off very quickly) – The Conventional 80/20. This typically provides the best deal if you can get the HELOC knocked out in a year or two.

FYI, we didn’t include closing costs to simplify the math. We always suggest asking lenders to provide an estimate with as close to zero closing costs as possible, at least for starters, to help you compare apples to apples. It’s much easier to compare mortgages structured similarly from a cost standpoint.

Should You Put Cash Down?

So then what if you have some cash to put down or are considering waiting until you have the cash? Let’s compare the physician mortgage with the 20% down conventional mortgage. Once again, I’ll assume both are structured to wrap closing costs into the loan to make the math simpler. In an effort to compare apples to apples, I structured the 20% down conventional loan to have the exact same payments as the physician mortgage loan. The only difference is the down payment and the interest rate.

Option #1 – $100K down payment conventional loan

    – $400,000 balance
    – 18.1183 year fixed rate at 3%
    – $2,387.08 per month principal and interest

Option #2 – $0 down payment physician mortgage loan

    – $500,000 balance
    – 30 yr fixed rate at 4%
    – $2,387.08 per month principal and interest

You’re probably thinking you’d take the $0 down option. Maybe you don’t have that much cash available or maybe you feel that’s not the best use of your $100,000. Maybe you’d rather use the extra cash to pay off loans or invest first. And 4% is still a really good rate. But how does it compare to the 20%?

Pic 2

Pic 3

The total lifetime interest costs equal:

    – Option 1 – $118,998
    – Option 2 – $359,348

Coming up with the $100,000 ends up saving over $240k interest savings plus the mortgage gets paid off almost 12 years sooner. That’s on top of the fact that having equity provides greater security and flexibility, especially in the event of the unexpected. With the 100% financed physician mortgage loan, you should expect to start out underwater. If something doesn’t work out and you’re forced to sell quickly, you should be prepared to write a potentially large check up to 10% of the purchase price to get out of the home.

On the flip side, you could finance 100% using the physician mortgage loan and then invest the cash. If you run those numbers, the end result will look much better. But not only does this require an aggressive investment, it also requires greater leverage on your home, which further adds to the risk. On top of that, it requires many years of disciplined investing and assumes you never spend any. This is much easier said than done.

At the end of the day, it’s a much better deal in the long run to use the conventional mortgage and get it paid off quicker. However, if you don’t have the cash for a down payment, that’s not possible, and the physician mortgage loan is a solid alternative to consider. However, it’s not always the automatic best solution.

What About Existing Physician Mortgages?

So what if you already have a physician mortgage loan? If you’re not paying attention to it, there’s a good chance you’re throwing away money. At worst, you should review your options for refinance if any of the following occur:

  • Interest rates drop
  • You reach 20% equity
  • You get below the jumbo limits
  • Your plans change

In the past few years there’s a good chance all four of these things have happened for many of you. Here’s an example of one the most common money saving opportunities we see play out with existing physician mortgage loans:

Dr. Smith bought her home using a 100% financed physician mortgage loan at 4.75% in July of 2013. The original loan amount was $500,000 and the monthly principal and interest payment was $2,608.24. Lifetime interest for that loan would have been $438,965.21. Fast forward 3 years to today and Dr. Smith’s property has appreciated to around $600,000 in value and she owes $475,712 on her original mortgage.

When she bought the home, she had no cash to put down and very little options. The physician mortgage loan was probably her best bet. But today, she has all sorts of options as a result of now having over 20% equity and earnings history. Odds are she’d be able to qualify the best deal around.

If she had the initiative to refinance, and wanted to keep the payment similar to what she was already used to, she’d be looking at a new 20 year fixed mortgage at 3%. The monthly principal and interest payment on the $475,712 new mortgage would be $2,638.29. More importantly, she’d be shaving 7 years off her repayment term with only a $30/mo increase in payment. That’s a home run.

If she had also compared refinancing into a new physician mortgage loan, it would have been better, but not near as appealing as the conventional mortgage. That’s because she’s now in the sweet spot of traditional mortgages.

Pic 4

When you’re considering a refinance, make sure to check out at least a few different lenders. And remember that while refinancing into a new physician loan may be a good deal, it’s not always the best. Doing your homework with a refinance will pay off. Ideally you also have someone, like a financial planner, that’s able to objectively help you analyze options.

When To Avoid Physician Mortgage Loans

You probably should stay away from physician mortgage loans if any or all of the following conditions apply:

  • The idea of physician mortgage loans is causing you to consider buying too much house
  • You have (or will have) at least 20% to put down on the home
  • You’re in the military – look at a VA loan instead
  • You expect a large influx of cash shortly after buying, and are using the physician mortgage to get the deal done now
  • You aren’t comfortable with the prospect of starting out 5-10% underwater on your home (aka you’d have to write a big check to get out of it should your circumstances change)

Alternatives To Consider Before Signing

In my opinion, it’s best to wait to buy or upgrade until you have at least 20% to put down on the home. This will allow you to get the best deal possible. Plus, you don’t have to take any of the risks that come with financing anything 100%.

If you like that idea, go ahead and rent for now and start stashing away cash today in preparation for buying your first home. If you already own a home and plan to upgrade, the best place to save for your future down payment is by paying your current mortgage off faster. You might even consider refinancing your current mortgage into a shorter term to get used to monthly payments. You can even structure the new loan to allow you to build equity to the amount necessary to have 20% by the time you plan to upgrade.

There are several other types of loans we didn’t cover that could come into play. Here are some of them:

1) The Conventional Loan with PMI typically requires at least 10% down. If you have 10% to put down, this may be a better option than the Physician Mortgage loan if you plan to own the home long enough for PMI to stop.

2) The FHA Loan typically requires 3% down, has very competitive rates but also comes with a monthly permanent fee similar to PMI. The monthly FHA fee makes it way less appealing for most borrowers.

3) The Jumbo Loan with PMI typically requires at least 10% down. This type loan would be worth comparing to larger physician mortgage loans. Often, it comes down to how long you plan to own the home. The Jumbo might have a lower rate but it also comes with PMI.

Other Mortgage Resources

If you’re feeling overwhelmed by all of these options, please reach out to us. We help clients navigate these types of decisions all the time. We’re happy to set up a free consultation to determine if we might be a good fit.

Or if you’d prefer to do it yourself, there are tons of resources online to help you learn more about mortgages. One of my favorites is the Mortgage Professor. This site includes a great inventory of mortgage calculators and spreadsheets to help analyze mortgage decisions. You can also check mortgage rates based on your circumstances and without providing personal information.

Also, White Coat Investor has a great post similar to this one where he breaks down how physician mortgages work. He has a very thorough list of physician mortgage lenders which includes the states they work in.

Have you had any good or bad experiences using physician mortgage loans?

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