Investing in real estate can provide passive income, but it could be more challenging if you’re a doctor looking for a physician loan.
There are physician loan options for investment properties, but it requires some creativity to get approved since most are only for primary residences.
Before you borrow money to buy an investment property, consider the factors that affect your decision, including how you’ll qualify for the financing to afford the property.
How Does a Physician Loan for Investment Property Work?
Physician loans allow doctors, pharmacists, dentists, and many other medical practitioners to buy a home with no money down, and sometimes no Private Mortgage Insurance.
It works great for doctors who don’t want to wait 10 to 15 years before their income is high enough to save a 20% down payment, pay down medical student loan debt, and feel secure. Instead, they want to buy a home now, and conventional loans don’t allow it.
But what about when you want to buy an investment property?
Maybe you’re a forward-thinker concerned about passive income now, right out of med school, rather than waiting 10 to 20 years.
Here’s the problem.
Physician loans aren’t for investment properties. They are a program primarily for your primary residence, with a few exceptions that allow use on a second or vacation home and rarely an investment home.
But there are ways to get a physician loan for an investment property, including house hacking, buying a duplex, or living in the house and then turning it into a rental.
The Benefits of Using a Physician’s Loan
If you’re in the market for an investment home but don’t have a 20%+ down payment, a physician’s loan could help you reach your goals.
While you must shop around to find a willing lender (there aren’t many), the benefits can be worth it.
- No down payment – Many lenders don’t require a downpayment on a physician’s loan. If they do, it’s usually much lower than conventional loans require. This allows you to invest in a home much sooner and earn rental income and capital appreciation.
- No PMI – Some lenders don’t require Private Mortgage Insurance, even with no down payment. This keeps your mortgage payment down and makes it more profitable to invest in property.
- More flexible debt-to-income ratios – Physician loans don’t consider your debt-to-income ratio the same as conventional loans. Some lenders use your Income-Based Repayment amount, and others don’t include your student loan debt in your DTI, making qualifying easier.
- Soon-to-be-employment accepted – If you have an employment contract but haven’t started working, you may still get approved for a physician’s loan. Many lenders take employment contracts that begin in 90 days.
Physician Loan Scenarios
Physician loans typically work only on primary residences, but if you have your eye on investing in real estate, there are a few ways to make a doctor’s loan work for your investment goals.
Consider these scenarios.
Live In Then Rent Scenario
The simplest way to buy an investment property with a physician’s loan is to buy the property as your primary residence. You can do this while in your residency or fellowship with many lenders.
You buy a house with no down payment and no PMI. As a result, you have a home to live in while you complete your training to become an attending physician.
After 3 to 5 years, depending on where you’re at in your career, you can move out of the property, list it as a rental, and buy another home. In some states, you can use a second doctor’s loan to buy another property, but not all.
This scenario may require some planning, though.
When you buy your property to live in, consider its future use. You should consider the area’s rental market if you list it as a rental. Make sure the home you’re buying will work as a rental in the area you’re purchasing it. If you’re buying an expensive home, the rent must be high to cover your mortgage payment and leave room for profit.
When you move out, you’ll need to qualify for financing to buy a home to live in too. This time, you must be eligible for the loan with your original mortgage payment figured into the debt-to-income ratio. If you haven’t rented the home out before you apply for the new loan, you may not be able to use the rental income as a source of qualifying income.
The Airbnb Scenario
If you aren’t ready to become a full-time landlord but want to make money on the house you bought with your doctor’s mortgage, consider renting it as an Airbnb.
With this method, you’re still a landlord of sorts, but you choose when you have renters. Unlike a full-time rental, you don’t always have to have people in the home. This allows you to rent it when you know you have time for upkeep and customer service and don’t have to be bothered with 3 AM phone calls for a busted pipe when you’re in the middle of a long shift.
As travel becomes more popular today, it can be lucrative to have an investment property without the non-stop responsibility. As an Airbnb host, you decide when your property is available, what amenities you offer, and what you charge.
This scenario works best when you live in the property and rent it out when you’re ready to move, as you’ll already have the doctor’s mortgage on the house.
The Duplex Scenario
If you don’t mind living next door to your renters, you can invest in a duplex. If you live on one side of the duplex, it’s an owner-occupied property with fewer restrictions.
The nice thing about the duplex scenario is you have someone paying the mortgage where you live.
The downside is that it’s hard to differentiate between thinking like a homeowner and a landlord. With your tenants living in the property too, you must think about numbers, not necessarily the home’s aesthetics.
When deciding if you should invest in a duplex to live and rent, consider the following:
- How much rent can you charge? Does it cover your mortgage payment, or is it only a percentage?
- What is the rental market in the area like? Do renters prefer duplexes?
- What are the expenses for the property? How much will keeping up the property for you and your tenants cost?
The House Hack Scenario
One final option is to house hack. This method requires patience because you’ll rent out spare rooms in your home.
If you buy a large enough house, this may work. But if you buy a smaller home and will be on top of your tenants, it can feel like an invasion of privacy.
Consider the situation carefully. Determine how your schedules work. Do you work opposite shifts and won’t run into each other often, or will you come home after a long shift only to be annoyed that someone else is in your home?
The cash flow can be nice because you have someone helping with the mortgage, but consider the non-financial downsides to determine if the money is worth it.
If you house hack, you’ll need a tenant agreement just like you would if you rented your entire house. Again, set the parameters from the start to ensure everyone is on the same page.
Extreme Risk Behind Physician Loans
Before using physician loans for investment properties, consider the risk. Like any investment, there is a risk of a total loss and, in this case, a substantial loss. For example, if you only purchase a home for investment purposes and it doesn’t work, you’re on the hook for a house worth hundreds of thousands of dollars. Likewise, the burden could be too much if you have another property you live in.
Here are some of the most common downsides to consider.
Income Is Not Guaranteed
There’s no way to guarantee you’ll always have renters. Vacancies are a common problem; if they happen too often, they can leave you without enough income to cover the mortgage.
Even if you always have tenants, there’s no guarantee your rent will be higher than the mortgage payment.
If you don’t make a down payment, or even a low down payment, your mortgage payment could exceed the market rent.
Whether you have tenants paying the rent or not, your mortgage payment continues to be due monthly, so make sure you can afford the payment without the rental income. In addition, try to only purchase an investment property in an area where the market rent will exceed the potential mortgage payment.
You Are the Property Manager
You are the landlord or person in charge when you rent a property. You’re on the hook for calls 24/7 about the property. If a pipe bursts, a door lock breaks, or the HVAC system stops working, you must have it fixed immediately.
You’re also responsible for handling tenants, collecting rent, and providing customer service. It’s a full-time job, and since you’re already a doctor, it can feel impossible to find time to handle it.
You can hire a property management company to give you a hands-off approach to investing; however, that increases your costs and decreases profits. In addition, if you already have a high mortgage payment, there may be little room for more costs.
Business and Pleasure Don’t Mix
Using the house hacking trick or even buying a duplex, you mix business with pleasure. In other words, you’re mixing where you live with your business.
When you own a rental property, it’s a business. The IRS even treats it as such, giving real estate investors many opportunities for tax deductions. But where do you draw the line?
Take house hacking, for example. You live in the house but also run a business renting out space in your home. You must think like a business owner, but you want to enjoy your home too.
Determining how to decorate the house to make it a home is also challenging. Yes, it’s where you live, but it’s also where you do business and make money. You might have trouble finding tenants if you make it too personal to your tastes.
Investment Property Lenders That Offer Physician Loans
As we said earlier, many lenders only offer physician loans on primary residences. However, the following lenders have different rules and allow loans on investment properties for doctors.
1. Investment Property Lenders
Investment property lenders for physician loans are hard to find because of the much higher risk. Most lenders won’t take the chance, but there’s one that will.
Frandsen Bank & Trust
Frandsen Bank & Trust offers physician mortgage loans in Minnesota and Wisconsin on primary, secondary, and investment properties.
Their down payment requirements vary, as do the loan limits based on your qualifying factors.
They make decisions themselves and can offer loans to those they feel qualify, including loans on properties you don’t live in and rent full-time.
2. Multi-Unit Primary Residence Lenders
It’s more common to find lenders that lend physician loans on multi-unit properties. Like a duplex, you can house-hack a multi-unit property by purchasing the entire building and living in one unit. This makes it an owner-occupied property.
You are then free to rent the other units to cover your mortgage and/or help you make a profit.
BMO Bank offers physician loans only on primary residences, but you can use the house hacking trick to buy a 2-unit property (they don’t lend on 3-4 unit properties).
Depending on where you live, they lend up to $2 million and sometimes 100% financing. To qualify, you must be an MD, DO, DDS, or DMD.
The loan program is available in all states except New York and is open to fellows and residents. BMO offers various loan terms, including fixed and adjustable-rate loans.
However, to qualify, you must not be more than ten years out of residency and cannot use the loan for second or investment homes.
GreenState Credit Union
GreenState Credit Union is located in Iowa, serving many midwestern states. They offer physician loans on up to 2-unit properties with no and low down payment options. If you don’t make a down payment, the maximum amount you can borrow is $750,000, but they loan up to $2 million with low down payments between 5% to 10%.
GreenState offers its physician loan program to medical professionals, including doctors, podiatrists, dentists, ophthalmologists, and veterinarians.
GreenState allows medical professionals to qualify with an employment contract if their employment begins within 60 to 90 days.
GreenState Credit Union offers fixed and adjustable-rate terms on 15 and 30-year loans.
Huntington Bank offers physician loans in many states with financing options that include no down payment. Even with no down payment Huntington Bank doesn’t require Private Mortgage Insurance, and there’s never a prepayment penalty.
You must be an MD, DVM, DDS, DO, or DMD to be eligible. In addition, if you aren’t yet employed, you must have an employment contract that begins in 60 to 90 days and proof of adequate reserves based on your qualifying factors.
The maximum loan amount is $2 million, but only $1 million with no down payment. So if you borrow over $1 million, you’ll need a 5% to 10% down payment.
Evolve Bank & Trust
Evolve Bank & Trust serves medical professionals nationwide, providing no down payment loans up to $1 million and loans up to $2 million with down payments between 5% to 15% depending on how much you borrow.
Evolve Bank & Trust doesn’t charge physicians PMI even with no down payment, and you can work in various medical professions, including dentistry, veterinary care, and chiropractic. They also open their program to nurses and nurse practitioners.
Like most banks, you can qualify for the loan before starting your position if you have an employment contract with proof of employment that begins within the next couple of months.
Evolve is one of the few banks on this list that will approve physicians’ loans on up to 4-unit properties.
3. Second Home Lenders
If you’re looking to purchase a second home that you might occasionally rent as an Airbnb, consider these banks that offer physician’s loans on second homes.
UMB Bank offers physician loans; however, you must be an attending physician, and they don’t lend to residents.
Like most banks on this list, they have a no down payment option of up to $1 million, but you can borrow up to $2 million if you qualify and have a down payment of 5% to 10%, depending on your loan amount.
UMB Bank’s program is only open to MDs, DOs, DDSs, ODs, and PharmaDs.
UMB bank doesn’t have age or time restrictions, allowing even older doctors to use the program and buy a second home.
Northpointe Bank offers the option for doctors to purchase a second home, but their maximum loan amount is $1 million, which is lower than most other banks.
However, Northpointe Bank offers its lending to many medical professionals, not just medical doctors and dentists.
You can close your loan with an employment contract; however, you can only get an adjustable-rate loan; they don’t offer fixed-rate physician loans.
Frequently Asked Questions
Borrowing a physician loan for an investment property is a big decision. Here are additional questions to consider.
Can you remove PMI on a physician loan for an investment property?
Most physician loans don’t require PMI. Because they aren’t conventional loans and aren’t backed by any government-sponsored entities, lenders aren’t required to charge Private Mortgage Insurance premiums.
Who can qualify to receive a physician loan?
Each lender has different requirements regarding who can qualify for a physician loan. They are generally open to medical doctors, such as those with an MD or DO. Many are also available to dentists with a DDS or DMD.
However, some lenders offer their programs to more medical professionals, including chiropractors, veterinarians, psychiatrists, and nurse practitioners.
Is it a good idea to take out a physician loan for an investment property?
Borrowing a physician loan for an investment property is risky for a few reasons.
First, buying an investment property is always risky, but if you’re using a physician loan with no down payment, you have a lot at risk.
Whether you have paying tenants, you’re responsible for the property’s mortgage payment. It can be a bad investment if you aren’t earning income on the property but are accountable for the mortgage payment.
However, a physician loan can help you invest in real estate and earn passive income in the right situation.
Are physician loans and conventional loans the same?
Conventional loans are backed by Fannie Mae and Freddie Mac, which are government-sponsored entities. If they meet their guidelines, they invest and purchase loans from lenders to free up a lender’s capital.
On the other hand, physician loans remain on a lender’s books. No entity invests or buys them from the lender. Typically, the lender you get the loan from services it, keeping it on their books. This allows them to create their own rules but also makes it riskier for them.
Is it difficult to receive a physician loan?
Every lender has different requirements. Some make it more difficult than others to get a physician’s loan. For example, some lenders exclude student loan debt from your debt-to-income ratio, making qualifying easier, while others include your Income-Based Repayment.
In addition, some lenders require a 5% to 10% down payment, and others don’t require any money down. Like any loan, shopping around to find the best terms is a good idea.
Physician Loan for Investment Property Bottom Line
Buying an investment property may feel right for the passive income, but a lot goes into owning a rental property. If you want to use a physician loan for investment properties, you’ll likely need to house hack or buy a duplex, living in one unit.
The key is determining the rent you can collect and compare it to the cost of owning and maintaining the home to determine if it’s worth it.