Physician Financing: A History

Back in the early 1990’s, very few resident doctors or new, practicing physicians could obtain a home loan. That all began to change later in the decade. Banks realized that there was a market out there for their mortgage business and devised loan programs specifically for this niche market.

The Challenges

Every year a new group of doctors graduate from medical school and residency. These professionals usually have little money and have been so consumed by the demands of their medical training that they may not have had the time to educate themselves financially. In addition, these new physicians have already accumulated significant debt; usually have no down payment; have no proven earnings; and often have not even started their job before buying a home in their new city! Before the advent of physician loan programs, these challenges made it difficult, if not impossible, to meet the underwriting criteria of lenders.

The Solution

A few select banks finally realized that these new physicians had tremendous future earning potential, and almost all of them would soon desire a mortgage. Because physicians’ chances of default are historically very low, they were a desirable market in spite of the challenges. It made sense to figure out a way to tap into this market that was being underserved at the time. These forward-thinking banks created specialized mortgages that took into account the unique situation of new physicians, and the doctor’s loan was born.

WHAT IS RIGHT FOR ME?

There are many factors that go into determining which loan program is right for you and your family. We have helped hundreds of doctors through this process, and we would be pleased to put our expertise to work for you. Contact us, and we can walk you through the financing options to help you make the decision that is best for you. Below you’ll find information that can help start the conversation.

HOW DO RATES AND FEES COMPARE?

The 20% down conventional has the lowest fees of most loans coupled with the lower rate, but many physicians do not have the cash available for the down payment. Even those who do may wish to allocate their resources for other uses.

Although the physician’s loan rate usually has among the highest published rates of all financing options, it usually has the lowest down payment. Fees can be harder to compare, but here are some factors to consider.

  • An FHA or conventional loan with less than 20% down will require PMI. PMI, unlike loan interest, is not tax-deductible for those at higher income levels (usually $100-109K).
  • You can usually eliminate origination/funding fees by putting 20% down (conventional or FHA). Most other loan options will require that you pay origination fees. These fees can start at 1.00% and go up from there.
  • Many physician’s loan programs will waive the origination/funding fee.
  • The physician’s loan rate is currently about 1/4% higher than a comparable FHA/VA loan.

If you’ve decided to buy a home and do not have or don’t want to put 20% down, then a physician’s loan is a reasonable option and is typically better than the other non-20%-down options.

However, as you can see, there is no “one size fits all.” Contact us today – we would be happy to put our expertise to work for you to help you find the best financing available for your situation.

PHYSICIANS LOAN PROGRAMS

The physician’s (or doctor’s) mortgage loan was developed to meet the unique needs of physicians (see our Physicians’ Loan History above.)

Below are the unique features of the doctor’s loan:

  • It is tailored to a new resident physician or new attending physician (7-10 years out of residency or less)
  • Requires little money down (0-5%)
  • Doesn’t require the borrower to purchase private mortgage insurance (PMI)
  • Will accept a contract as evidence of future earnings (instead of paystubs the doctor doesn’t yet have)
  • Usually requires the physician to open a bank account at the bank from which the mortgage is paid by auto-draft
  • Is designed for single family homes. Condominiums may have additional restrictions, including an increased down payment
  • Has the same rate whether loan amount is above or below “jumbo loan” limit ($417,000 in central Indiana)
  • Some programs even allow the borrower to use gift money for a down payment
  • Requires cash reserves equivalent to a few months of Principle, Interest, Taxes, and Insurance (PITI), and a reasonably good credit score
  • Often doesn’t calculate student loans toward the loan to income ratio

OTHER FINANCING OPTIONS

Conventional 20% Down Mortgage

Often the best choice for a mortgage as it offers the most options (30 year fixed, 15 year fixed, ARMS etc), the lowest fees, and the lowest rates. It does require proof of earnings and a substantial sum of money to put down.

FHA Loan

This loan has similar rates and fees to a 20% down loan, but higher mortgage insurance, notably a 1.75% up front Mortgage Insurance Premium (UFMIP). FHA Loans have a 3.5% required down payment, and require monthly mortgage insurance payments that can never be removed (unlike a Conventional Loan). The interest rates are generally higher, but slightly lower than a physician’s loan. However, when the monthly MIP is added to the rate, it is often higher than a physician’s loan.

VA Loan

This loan requires that you qualify for VA benefits, which disqualifies many. It is an improvement on the FHA loan in that the 3.5% down payment is not required and there is no mortgage insurance requirement. Rates are similar to FHA rates, but the 2.15% funding fee is higher (as compared to the UFMIP).

Conventional Mortgage with Less than 20% Down

These loans have higher rates and fees than a 20% down mortgage. They also require you to purchase PMI. It is rare for you to find one that is 0% down, but 5% and 10% down are common.

80/20 & 80/15/5 Loans

The theory is that you would get an 80% loan at a slightly higher rate than on a 20% down loan, then get a 20% loan at a much higher rate. You would avoid Private Mortgage Insurance (PMI), which isn’t tax-deductible, replacing it instead with more interest. The 80/10/10 and 80/15/5 are variations on the theme, with a down payment required.