Paul Rainer Physician Construction Loan Financial Residency

Benefits of Applying for a Physician Construction Loan

A Physician Construction Loan is a special type of physician mortgage for physicians looking to buy land and build their own home. It is a mix between a physician mortgage and a construction loan that offers special terms for physicians. 

We interviewed Paul Rainer, a Mortgage Loan Originator at Synovus (NMLS 116670) to learn more about physician construction loans. Synovus is an Equal Housing Lender, their loans are subject to approval, including credit approval, and are subject to change. 

Who qualifies for a Physician Construction Loan? 

If you’re a physician, even if you’re still in your residency or fellowship, chances are you could qualify for a Physician Construction Loan. 

To qualify for a Physician Construction Loan, you typically must be an MD, DO, DDS, DPM, or DMD. 

You’ll also need to be within 60 days of your employment start date at the time of closing if you plan on using your new income. This is extremely helpful for residents nearing the end of their residency who want to use their attending income. 

According to Paul, he “sees the majority of demand for these loans coming from residents leaving their residency and transitioning into their attending position.” 

As long as the resident has a contract showing their new income and will be within 60 days of their start date at the time of closing, they can be approved based on their attending salary. 

Some Physician Construction Loans have limitations on how long ago you completed your residency, and will not approve physicians that are more than 10 years out. 

How Much Can I Qualify For Using a Physician Construction Loan? 

Unlike a typical mortgage, limitations on the amount financed on a Physician Construction Loan are restricted by the cost of the land plus the cost to build your new home as determined by the builder. 

Just like other mortgages, how much you’re approved for is also based on your income and your credit. Your debt to income ratio plays a large role in how much you can borrow or how much you are required to put down. This is the ratio of your minimum debt payments to your income. 

How the Maximum Total Amount Financed is Determined

The maximum amount financed is determined by the formula below.

( Cost of Land + Cost to Build ) * Maximum Loan to Value %  = Total Amount Financed Limit

The Cost of the Land

Determining the cost of the land is fairly straightforward. Just like when you buy a home, you’ll submit an offer and the cost of the land is the price the seller is willing to accept. 

However, you’ll want to check to see if there will be any additional costs incurred to remove existing structures such as an old home or shed. 

The Cost to Build

Lenders typically work with your builder to determine the cost to build. 

Most lenders encourage the builder to pad costs by using high-end estimates to build. This is done to protect you from higher than approved building costs as your loan cannot be increased once approved. If the final cost to build is lower than expected, the difference will be settled at the time of closing. 

Maximum Loan to Value % 

Depending on the total amount financed, your loan to value percentage might be lowered. This means that you will be required to put a larger down payment. 

Currently, according to Paul at Synovus, their loan to value ratio schedule for physician construction loans looks like this: 

Up to $750,000: Maximum of 95% Loan to Value 

$750,000 to $1 Million: Maximum of 90% Loan to Value 

$1 Million to $1.5 Million: Maximum of 85% Loan to Value 

$1.5 Million and Higher: Maximum of 80% Loan to Value 

The maximum loan to value for physician construction loans under $750,000 is typically 100%, however, it was lowered to 95% during the pandemic and could be raised to 100% at a later date. 

Most construction loans have a maximum loan to value percentage of 80%, however, for physicians, it is typically higher. 

For Non-Permanent Resident Aliens, the maximum loan to value percentage is 80% regardless of the size of the loan. 

Determining Your Debt-to-Income Ratio

Student Loans Impact to Your Debt-to-Income Ratio

Student loans play a major role in most physicians’ debt-to-income ratio, so it’s important to understand how these are treated when taking out a Physician Construction Loan. 

For Borrowers on Fixed Repayment Plans

For physicians with student loans who are on a fixed repayment plan, such as the standard 10-year repayment plan, the monthly payment you pay is used in your debt-to-income ratio when calculating your debt-to-income ratio for a Physician Construction Loan. 

For borrowers on a fixed repayment plan, their initial cap on their debt-to-income ratio is up to 50%. This means the maximum amount of your income the lender is willing to have to go to debt is 50%. 

For Borrowers on Income-Driven Repayment Plans

For physicians with student loans on an income-driven repayment plan, the payment you are actually making is used in your debt-to-income ratio. This is a major differentiator between physician mortgages and normal mortgages as most mortgages are based on the 10-year repayment plan monthly payment even if the borrower is on an income-driven repayment plan. 

If you are currently a resident and you’re able to use your attending salary, your debt-to-income ratio could be much lower. Be sure to review your post-residency budget to ensure your new loan isn’t too high even with your attending salary. 

For borrowers on an income-driven repayment plan, their initial cap on their debt-to-income ratio is up to 43%, 7% lower than borrowers on a fixed repayment plan. 

Cash Reserve Requirements for a Physician Construction Loan

Some lenders require that you have 10% of the total cost to build, not including the land cost, in assets. For example, if you finance $400,000, you’ll need $40,000 saved somewhere such as in a savings account or retirement account. This cash reserve requirement is to hedge yourself against higher than expected building costs. 

Credit Score Requirements for a Physician Construction Loan

Most Physician Construction Loans require a credit score above 670, however, some lenders have raised their minimum credit score requirement recently to 710. As your credit score increases, your risk level declines and most lenders will allow a higher debt-to-income ratio for borrowers with a higher credit score.  

Financing for a Physician Construction Loan

On a Physician Construction Loan, the loan to value ratio and your maximum debt to income ratio we reviewed above are both used to determine the amount you can finance. 

Let’s take a look at an example. After speaking with a lender, we’ll assume your financing limits are as follows:

  • Maximum loan to value ratio is 95%
  • Maximum debt to income ratio is 40% 

For this example, I’ll assume a few things including:

  • A gross income of $150,000
  • Total acquisition costs of $400,000 (land plus cost to build)

To estimate how much you can finance, we’ll start by using the loan to value percentage: 

(Maximum loan to value ratio of 95%) * $400,000 = $380,000

So, before diving into the effects of your debt to income ratio, we already know that you will need to put down 5%, or at least $20,000. 

Next, we’ll review the debt to income ratio to see if that places additional limits on the amount you can finance. 

With a debt to income ratio of 40%, your monthly payment will need to remain under $5,000 a month. We found this monthly limit using the following formula:

($150,000 Gross Income) * 40% / 12 months = $5,000

Because the amount we can finance is already limited to $380,000, we’ll estimate the monthly payment on this using a financial calculator. 

We found that a $380,000 loan at 4% would have a monthly payment of $1,814 excluding taxes and insurance. Because this is well under our maximum monthly payment of $5,000 from our debt to income ratio, there shouldn’t be additional limitations on the amount we finance. 

However, if you have student loans or other debt obligations, your debt to income ratio could further limit the amount you can finance. To offset these limitations your options include using a larger down payment or reducing building costs. 

This is a fairly simple example; when reviewing the maximum amount you can finance, you’ll need to review your financials with your lender. 

Are the rates competitive for Physician Construction Loans?

Most Physician Construction Loans have competitive rates, similar to rates you would find on a normal physician mortgage. As of May 2020, Paul at Synovus says their rates typically fall close to 3.25% on a 30-year fixed-rate mortgage. 

However, it’s important to understand that the rate you are quoted at the beginning of your home building process might not be the rate of your final mortgage. 

Construction Loans typically have a two-close process, meaning there are two points throughout the process that a closing is required – we’ll dive into that in just a moment. Because some Construction Loans require a two-close process, the rate you are quoted at the beginning of the process might not be the rate of your final mortgage. If a home takes a year to build, and rates have drastically changed over that year, your final mortgage could have a much higher rate. 

However, according to Paul at Synovus, their Physician Construction Loans have a one-time closing policy allowing your rate to be locked in from the beginning. 

Do Physician Construction Loans have PMI?

No PMI, or Private Mortgage Insurance, is typically required on a Physician Construction Loan even if you do not put down 20%. 

Underwriting Process

The underwriting process for Physician Construction Loans is fairly simple. 

You will be required to show proof of income, through W2’s, tax returns, or contracts if you are using income that starts within 60-days from closing. 

Lenders will work with the builder to ensure that all costs to build have been accounted for. 

Closing

Some lenders will offer a one-time-close meaning there is only one set of fees, closing costs, and your rate is locked in. 

If your lender uses a two-time closing process you’ll need to prepare for changes in your rate, appraisal differences causing the value of your new home to decline which could cause your loan to value calculation to change, as well as any possible changes to your income which could affect your debt to income ratio. 

How do Payments During Construction work with a Physician Construction Loan?

Builders typically will not wait until a home is completely built to be paid. Along the way, they will need to pay for supplies, contractors, and permits. Lenders, such as Synovus, typically have a process for paying the builder throughout the building process. 

Paying the Builder

Paul at Synovus says they use an app and vetting process to pay their builders. Each builder is vetting through a process of reviewing their financials and past work. 

Once a builder is vetted, and construction begins, they use an app called Built where builders request payment, the borrower can approve the charge, an inspection will be ordered and once the inspection is complete, the money is sent to the borrower who can then pay the builder or contractors as needed. 

By using their own app, they are able to track expenses and ensure that the project isn’t at risk for costing more than the approved estimate to build. 

Paying the Mortgage

Borrowers typically are required to pay interest-only payments on the amount they have drawn at the time of the request during construction. 

After Construction

After your home is built, the lender will covert your loan to a normal amortized mortgage. At that point, your mortgage is treated just like any other physician mortgage. 

You’ll want to ensure that your builder and their subcontractors have all been paid. Keep copies of invoices, receipts, and payments for a few years just in case they are needed. 

If you’re considering buying land and building a custom home on it, a physician construction loan could save you money compared to a normal construction loan. 

Be sure to ask your lender what the process will look like, when your rate is locked in, and if you will need to pay closing costs twice. 

Building a custom home on your own land is a stressful, yet rewarding endeavor on its own – don’t let the financing of this project bring you additional stress. 

Ryan Inman