Applying for a Physician Construction Loan: 2023 Guide

Physician construction loans can help you build your dream home without having to save for a 20% down payment.

Imagine a world where you have your long-sought-after medical degree, a good job, and your dream home in a place you love.

It may feel like a pipe dream if you’re drowning in student loan debt or discouraged by the current inventory of homes in your local market, but thinking outside the box can help you take charge of your future.

What is a Physician Construction Loan?

A physician construction loan is a type of doctor loan for physicians and other medical professionals looking to buy land and build their dream homes.

It is a mix between a physician mortgage and a construction loan that offers special terms for physicians. You may also see it referred to as a physician home loan.

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 and member of the FDIC, their loans are subject to approval, including credit approval, and are subject to change.

Who Can Qualify For Physician Construction Loan?

1. Hold a Qualified Degree

To qualify for a physician construction loan, medical professionals must hold an acceptable degree.

It’s typical for medical doctors (MD), doctors of osteopathic medicine (DO), doctors of dental surgery (DDS), podiatrists (DPM), and dentists (DMD) to qualify, but sometimes you’ll see programs that include veterinarians (DVM) and other high-earning professionals.

There are a few exceptions, so it’s important to meet with a loan officer to understand all your options before making a decision. 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.

2. 60 – 90 Days from Employment to Use New Income

You will need to be within 60–90 days of your employment start date at the time of closing if you plan on using your new income. Otherwise, you’ll need to provide at least two years of tax returns or self-employment income.

Physician loans are lenient with employment contracts for early career physicians because you are statistically less likely to default on your loans due to your high earning potential.  This leniency is extremely helpful for residents nearing the end of their residency who want to use their attending physician income.

According to Paul, “the majority of demand for these loans comes from physicians leaving their residency and transitioning into their attending position.”

As long as the resident has a signed contract showing their new income and will be within 60–90 days of their start date at closing, they can be approved based on their attending salary.

Some physician construction loans impose age limits. For example, it’s typical to see special rates for physicians who are within 10 years of completing residency.

3. Home Purchase or Refinance of a Primary Residence

In general, you’ll only be able to use a physician construction loan for the purchase or refinancing of a primary residence.

4. Proof of Sufficient Cash Reserves

You may also be required to show proof of sufficient cash reserves or open an online banking account with your lender to be approved.

Medical school debt can be a barrier to homeownership for many physicians and lenders understand that.

For that reason, physician construction loan underwriters will often be flexible with debt-to-income calculation to help more medical professionals qualify.

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

Like other mortgage loans, your approved loan amount is also based on your income and credit history. Your debt-to-income ratio plays a large role in how much you can borrow and your down payment options.

The maximum loan amount you’re eligible for will be based on the cost of the land plus the cost to build your new home as determined by the builder.

Your debt-to-income (DTI) is a calculation of how much of your monthly income goes toward paying debt, such as credit cards, car loans, mortgage payments, and student loans.

Conventional loan programs often like to see DTI ratios lower than 43% but some physician mortgage loan programs will be flexible with DTI as high as 50%.

Physician mortgage loans are also more likely to be flexible with student loan debt, so your DTI ratio may not be as high as you think.

How the Maximum Loan Amount is Determined:

Your maximum loan amount financed is determined by the formula below.

• The Cost of the Land: Determining the cost of the land is fairly straightforward. The cost of the land is the offer amount the seller is willing to accept. The cost of the land is not always the same as the list price. 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 before you’re able to build.
• 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 (LTV) percentage might be lowered. This means that you will be required to put in a larger down payment.

Currently, according to Paul at Synovus, their LTV ratio schedule for physician home loans is structured as follows:

• 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%. Synovus lowered its maximum LTV to 95% during the pandemic, but it could be raised to 100% at a later date.

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

The maximum loan-to-value percentage is 80% regardless of the size of the loan for non-permanent residents.

With that said, every lender and loan amount will have different terms, so it’s important to meet with a qualified loan officer or financial advisor to make sure you’ve exhausted your down payment options and found the mortgage program that works best for you.

Determining Your Debt-to-Income Ratio with Student Loans

Student loan debt plays a major role in many physicians’ debt-to-income ratio, so it’s important to understand how your debt will be treated before taking out a physician construction loan.

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 into debt is 50%.

Borrowers on Income-Driven Repayment Plans:

For physicians with student loans on an income-driven repayment plan, the payment you are 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. You may need an even higher credit score if you’re looking for 100% financing.

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. In general, borrowers with higher credit scores are eligible for the most competitive interest rates.

Physician Construction Loan Financing

The loan-to-value ratio and your maximum debt-to-income ratio we reviewed above are both used to determine the total amount you can finance.

Let’s take a look at an example assuming financing limits are as follows:

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

For this example, let’s consider:

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

To estimate your approved loan amount, we’ll start by using the loan-to-value percentage:

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:

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.

Are Rates Competitive for Physician Construction Loans?

Most physician construction loans have competitive interest rates––similar to rates you would find for a normal physician mortgage. In May 2020, Paul at Synovus said their interest rates typically fall close to 3.25% for a 30-year fixed-rate mortgage. These rates have risen to 7.116% in March 2023.

As such, 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 where closing is required – we’ll dive into that in just a moment.

Because some construction loans require a two-close process, the interest 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, physician construction loans don’t have PMI or private mortgage insurance. PMI is typically required for borrowers with less than 20% equity in their homes, but physician construction loans waive this requirement.

Not requiring PMI can reduce mortgage payments by hundreds of dollars per month. PMI is typically 0.58% to 1.86% of the original loan amount per year. The amount will be spread across your monthly payments.

Underwriting Process

The underwriting process for physician Construction Loans is fairly simple. You will be required to show proof of income, through W2s, tax returns, or contracts if you are using income that starts within 60–90s days of 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, and closing costs, and your interest rate is locked in.

If your lender uses a two-time closing process you’ll need to prepare for changes in your interest rate, appraisal differences, and any changes to your income. Appraisal differences can cause the value of your new home to decline which could cause your loan-to-value calculation to change. LTV will ultimately affect the down payment options you qualify for.

Any of these changes could have a major impact on your monthly payments, so it’s important to be prudent and proactive when considering your loan options.

How Do Payments Work With Physician Construction Loans?

Builders typically will not wait until a home is completely built to be paid for. 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 vetted 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 of costing more than the approved estimate build.

Paying the Mortgage

Borrowers are often required to pay interest-only payments on the loan amount they’ve needed to build the home. Construction loans can be riskier for lenders than other mortgage loans, so you may see it reflected in a higher interest rate.

If you’re unsure if your construction loan will require you to make interest-only payments while your home is being built, contact your lender for clarification.

After Construction

After your home is built, the lender will convert 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 your dream 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.

How to Find Physician Construction Lenders

Physician construction loans are offered by the same lenders of physician mortgage loans, which are typically credit unions, banks, and private companies.

However, the mortgage loans offered by each lender can vary by state, even geographic location within the state, market conditions, and other factors.

We’ve vetted dozens of providers across the United States so we could recommend the best physician mortgage loans in each state. If you’re looking for a physician construction loan, we recommend discussing your options with a loan officer, financial advisor, or mortgage broker.

Physician Construction Loan FAQs

What type of loan is best for construction?

The best type of loan for construction will depend on your needs and expected budget. Construction loans can be structured in two ways. You could opt for a one-time close, which would make your loan “construction-to-permanent.”

This type of loan is all-in-one, meaning it will pay for the construction costs and then convert to a permanent mortgage when the home is built. One-time-close construction loans are the most popular loan option for borrowers looking to build a new home.

Two-time close loans will have an initial short-term loan for the construction costs and then you’ll apply for a traditional mortgage after the home is built. Two-time close loans provide a bit more flexibility by allowing you to shop around for the best rate once your home is built.

Is a physician loan the same as a conventional loan?

No, physician loans are not the same as conventional loans because physician loans are specifically designed for medical professionals and borrowers with eligible degrees. Conventional loans are open to the general public.

Are construction loans difficult?

Yes, construction loans can be difficult because they are considered riskier for the lender. Construction loans are difficult in part because the costs to build are harder to estimate and it’s challenging to appraise an asset that doesn’t yet exist.

As such, it can be harder to qualify for a construction loan than a traditional mortgage. Any good loan officer will work with you to help you qualify for a loan that meets your budget and goals for your financial future, so even if you’re not in a position to qualify now, you can take steps to increase your approval odds at a later date.

How long does it take to qualify for a construction loan?

It can take as long as 45 days to qualify for a construction loan. While traditional mortgages may approve you in as little as 7–10 days, construction loans require additional steps. Getting pre-approved can help expedite this process.

Construction loan underwriters will want to review plans, building contracts, and specs before the mortgage can be approved, so it’s a good idea to have all your documentation together when you apply.