On the surface, physician mortgage loans look great. No money down. No jumbo limits. No private mortgage insurance (PMI). Finally, it seems like a product exists to reward you for your time training to be a physician. After all, it’s been tough. For the past few years, you’ve watched many of your friends become homeowners.
While they were posting their latest photo of a fun, DIY home renovation, you were stuck in the library studying pathology. While they hosted a summer barbeque in their own backyard, you were sitting through an 8 hour board exam (and timing your breaks perfectly so you could scarf down a protein bar).
But, let’s be real. Lenders are in the business to make money, and they can’t just give you a free ride. So, how do physician mortgage loans stack up against everything else that’s available? Are they really as good as they sound? Let’s find out.
At this point in the home buying process, you’ve already made a solid decision about how much to spend on your home and you have your financial ducks in a row. So, the next step is to decide how to finance your home and whether a physician mortgage loan is the best option for you.
Before we jump in, if you’d rather listen in on an overview of how physician mortgages work, check out this podcast from Finance For Physicians:
To help you make an informed decision, we’ll cover:
- How Physician Mortgage Loans Work
- Alternatives and How They Compare
- Deciding On The Best Mortgage For Your Situation
- 1 Physician Mortgage Loans
- 2 What’s So Special?
- 3 Who Counts as a Qualified Borrower?
- 4 Who Offers Physician Mortgage Loans?
- 5 Mortgage Expenses:
- 6 Rates and Costs – An Example
- 7 Which Option Should You Choose?
- 8 Should You Put Cash Down?
- 9 What if You Already Have a Physician Mortgage?
- 10 When Should You Avoid Physician Mortgage Loans?
- 11 Alternatives to Consider Before Signing
- 12 Other Mortgage Resources
Physician Mortgage Loans
First, let’s talk about why physician mortgage loans even exist. The reason is that physicians are extremely profitable customers for lenders. They take out big loans early in their careers and almost always pay them off. Lenders use physician mortgage loans to lock in early-career doctors by lending them more money with fewer stipulations than their competitors. They make it even more appealing by marketing it as a “special program” just for physicians.
Keep in mind, though, that their ultimate goal is to get you in the door and sell you other products as your needs change. A medical student transitioning into residency with zero earnings history, no cash and a boatload 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 are appealing at first, but often end up being more expensive than the alternatives. That’s why it’s so important to compare physician mortgage loans to other types of mortgage loans before making your decision.
What’s So Special?
So how is the physician mortgage loan different than a typical mortgage? Here are some of its 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)
- Lending based on a physician’s signed employment contract
- Less critical of student loan debt
Who Counts as 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.
Who Offers Physician Mortgage Loans?
There’s a growing list of lenders offering physician mortgage loans, including:
- Fifth Third Bank
- Bank of America
- BB&T Bank
- Huntington Bank
- Republic Bank
- Regions Bank
- SunTrust Bank (now Truist)
- Bank of Nashville
- US Bank
- Central Bank
- Citizens Bank
- Fairway Independent Mortgage
- Physician Loans
Also, please note that we do not have a financial relationship with any of these lenders – we just want to help you explore your options. If you’re a lender and would like to be added to our list, please let us know.
So now that I’ve explained why physician mortgages are different and why they appeal to many young docs, it’s time to take a look at mortgage expenses. Many people focus on the monthly payments when considering buying a home, but there are several costs that make up your total mortgage expenses:
- Interest – The cost of interest is based on 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
The first thing you need to know about physician mortgage loans is that many lenders are willing to lower their fees, especially when they know it’s competitive. On many occasions, our clients get offered discounts once the lenders realize they’re talking to multiple lenders. If you want to get the best deal, make sure it’s clear to the lender that you’re talking with multiple competitors and it’s not a sure shot for them.
Closing costs and interest rates are kind of like a teeter totter: reducing closing costs on a mortgage increases the interest rate — Or if you want the lowest rate possible, you’ll have higher closing costs. You can see how this works in this breakdown from the Mortgage Professor website.
As for PMI, you either have it or you don’t. It’s typically going to cost between 0.3% to 1.5% of the original loan amount per year. A surefire way to avoid PMI is to put 20% down. Some loans, however, like the physician mortgage loan, do 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%). But keep in mind that all of these PMI avoidance tactics come with additional costs.
If you’re curious to see how all of these expenses add up in your situation, we’ve got the perfect tool for you. It’ll show you how various scenarios translate into monthly payments, and it also includes estimates for all of the hidden expenses – like home maintenance and utilities. You can see how this all adds up over the lifetime of the loan.
Rates and Costs – An Example
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 0% down payment mortgages with no PMI? Here are the most popular with some example rates. These are not actual rates and are examples only:
- 1) Physician Mortgage Loans: 30 yr fixed rate – 4.75%
- 2) Physician Mortgage Loans: 7/1 ARM – 3.75%
- 3) Conventional 80/20:
– First mortgage (80%) – 30 yr fixed – 4.25%
– Second mortgage (20%) – Interest only HELOC (prime + .5%)
- 4) VA Mortgage (must be military): 30 yr fixed rate – 4.25%
Which Option Should You Choose?
If you’re in the military and especially if you’re disabled, the VA Mortgage can be a solid option.
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 seven years. The conventional 80/20 offers the best rate on the primary mortgage, but the second mortgage has a variable rate.
Assuming you’re not in the military and can’t get a VA Mortgage, you should base this decision on how long you’ll own the home and how much you plan to pay on the mortgage. Let’s go over the best options based on these factors:
- 0-7 years – If you don’t foresee yourself living in the home for at least seven years, the Physician Mortgage Loan 7/1 ARM is often your best option. But, really, if you plan on living in it for fewer than five years, you should be renting.
- 7+ Years (and average income and savings) – In this case, the Physician Mortgage Loan with 30-year fixed rate is appealing (or 15 yr fixed if you have the cash flow). But this should be revisited when you have 20% equity, you drop below the jumbo limits or if rates drop in general. Once you fit the profile, you can often refinance into a new, non-physician loan that’s more competitive.
- 7+ Years (and ability to pay the HELOC off very quickly) – The Conventional 80/20 starts to look much better especially if you can get the home equity line of credit knocked out within a year or two. On the other hand, if you really have this much cash flow, maybe you should be looking at a 15 yr mortgage instead.
Closing costs tend to complicate things quickly. To simplify the math, we didn’t include any closing costs. Keep this in mind when you’re comparing various mortgage options. Ask the lenders to provide quotes with as close to zero closing costs as possible – at least for starters. It’s much easier to compare mortgages structured similarly from a cost standpoint.
Should You Put Cash Down?
What if you have some cash to put down or are considering waiting until you have the cash? In that case, you’ll be comparing the physician mortgage with the conventional 20% down mortgage. Once again, we’ll assume both are structured to wrap closing costs into the loan to make the math simpler. To give you a clear comparison, let’s structure 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
Looking at those numbers, you’re probably thinking you’d take the $0 down option. Maybe you don’t have that much cash available or maybe you think there are smarter ways to use that $100,000. You could use it to pay off loans or start investing. And 4% is still a really good rate. But how does it really compare to the 20% down option?
The total lifetime interest costs:
- Option 1 – $118,998
- Option 2 – $359,348
As you can see on the charts above, putting $100,000 down will end up saving you over $240k in interest. Plus (and this is a huge plus), you’ll get your mortgage paid off almost 12 years sooner.
Additionally, don’t forget that having equity in your home will provide greater security and flexibility, especially if something unexpected happens. 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 for up to 10% of the purchase price just to get out of the home.
On the flip side, if you do come up with the $100,000, you could finance 100% using the physician mortgage loan and 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. It will also require many years of disciplined investing and assumes you never spend any of it. That’s not impossible, of course, but it’s much easier said than done.
At the end of the day, getting the conventional mortgage and paying it off more quickly is a much better deal. If you don’t have the cash for a down payment, however, the physician mortgage loan is a solid alternative worth considering. Still, it’s not always automatically best solution.
What if You Already Have a Physician Mortgage?
If you already have a physician mortgage loan but you’re not paying attention to it, there’s a good chance you’re throwing away good money. 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 a scenario that illustrates one of the most common money saving opportunities for physician mortgage loan borrowers:
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 with monthly principal and interest payments of $2,608.24. The lifetime interest for that loan would have been $438,965.21. Fast forward three 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 few options. The physician mortgage loan was probably her best bet. But now that she has over 20% equity and a healthy earnings history, all sorts of options have opened up. Odds are she’d be able to qualify for the best deal around.
If she had the initiative to refinance and wanted to keep the payment similar to the one 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 come up to $2,638.29. More importantly, she’d be shaving seven years off her repayment term with only a $30/mo increase in payment. Now that’s a home run!
She could also consider refinancing into a new physician mortgage loan. That would have been better, but nowhere near as appealing as the conventional mortgage. She’s now in the sweet spot for traditional mortgages and she should take advantage of it.
When you’re considering a refinance, be sure to check out a few different lenders.
And remember, while refinancing into a new physician loan may be a good deal, it’s not always the best one. Doing your homework before refinancing your physician mortgage loan will pay off. Ideally, you also have someone, like a financial planner, who can help you analyze your options objectively.
When Should You Avoid Physician Mortgage Loans?
Perhaps by now, you’re more excited than ever about buying a house, especially now that you know an option exists where you can get a home with $0 down and no PMI. However, in order to cover all my bases, I did want to point out that you should probably stay away from physician mortgage loans if any or all of these conditions apply:
- The ease of getting a physician mortgage loan is tempting you to consider buying too much house
- You have (or will have) at least 20% to put down on the home. In this situation, a conventional mortgage is best.
- You’re in the military. In this situation, 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 (in other words, you don’t want to write a big check to get out of it if your circumstances change)
You can read more about these points in our blog post: “5 Physician Mortgage Loan Downsides You’ve Not Considered.”
Alternatives to Consider Before Signing
In my opinion, it’s best to wait until you have at least 20% to put down on the home. That way, you’ll to get the best deal possible. Plus, you don’t have to take on 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 some cash in preparation for buying your first home. If you already own a home and plan to upgrade, the best way to save for your future down payment is by paying your current mortgage off more quickly. You might even consider refinancing your current mortgage into a shorter term to get used to monthly payments. You can also structure the new loan so that it allows 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 the PMI to stop.
2) The FHA Loan typically requires 3% down and has very competitive rates, but it also comes with a monthly permanent fee similar to a 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 of 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
There are many online resources to help you learn more about mortgages. Some examples include:
- The Mortgage Professor: A site with several mortgage calculators and spreadsheets to help analyze mortgage options.
- White Coat Investor List of Physician Mortgage Lenders in the US: Check out Jim’s listing of many of the physician mortgage lenders in the US organized by state.
Also, 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 find out whether we’re a good fit.
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