Let’s start at the beginning: a mortgage is a loan you take out from a bank or credit union for the specific purpose of financing the purchase of a home.
Mortgage terms are generally similar, one mortgage to the next. They contain the principle of the loan, plus interest, property taxes, and insurance. You might have to pay homeowner’s association fees, which aren’t part of the loan but are something to consider when determining how much house you can afford to buy.
You most likely need some money for a down payment, but the amount can vary. Depending on the type of loan you get and your credit history, you might have to pay private mortgage insurance, known as PMI.
PMI is added money that a borrower might pay in addition to the costs of the loan. Put another way, it’s a fee that lender may require in order to loan money to someone who does meet the conventional standards to qualify for a home loan.
After the principle, interest rates are generally the biggest variable for homebuyers. While the specific rates for home loans generally hover in the same range for most buyers, there are variables that affect the specific rate, such as how much house you want to buy compared to how much money you earn, or the strength of your credit score.
So while some of the finer details or a mortgage can change lender by lender, borrower by borrower, based on your salary and credit plus changes in the market and in federal interest rates, qualifying for a home loan is essentially the same for everyone with regard to two important points:
- Most people cannot afford to buy a home outright; and
- Nearly everyone requires financing of some sort.
Good debt versus bad debt
You might think that with student loans hanging over your head, taking on another large debt might not be the best idea. There is a difference, though, between good debt and bad debt.
Good debt allows you to build up your credit rating while gaining something of value, such as a house or a car. It’s when you borrow an amount of money reasonable in comparison to your income level, and that you can pay back in an acceptable time frame. Good debt helps you to gain goods or services – like a car or medical degree – that will improve your life but that you might otherwise not be able to attain.
Bad debt is when you buy things you know you can’t afford today but plan to pay off tomorrow. Running up charges on your credit cards is bad debt. It’s not uncommon for people to get stuck in the cycle of making only the minimum payment on their credit cards, and then get buried deeper and deeper into debt without anything to show for it. Buying more car than you can afford is also an example of bad debt.
Why have a mortgage?
Even wealthy people can’t afford to purchase a home outright. Even if they could, any financial advisor worth his or her paycheck would advise against it. While real estate is historically a good investment due to a high rate of return over time, the market can and does change.
Being stuck with a home you overpaid for when the market takes a downturn could put you underwater, making it impossible to sell the property for as much as you paid for it, let alone for a profit. You could be stuck either renting the property at below-market value or selling via a short sale. Neither of these options are particularly.
So, we finance our homes, much like we do with cars and even cell phones, now that cell phones are so expensive.
As long as we shop around for the most competitive interest rates and choose a home that is realistically within our means, buying a home could be a very sound investment.
Financing a home allows you to weather changes the market while building equity, making home ownership a stable investment as well as providing you with a place to live.
Your monthly payment won’t change, unlike with a traditional apartment, where the rent can increase by as much as ten percent or more per month every time your lease is due for renewal. Granted, your property taxes could fluctuate up and down a little year over year, but there is a cap on that so you always have a good idea of what to expect.
As a physician, you might be wondering if it’s even possible to buy a house. After all, you have that student loan debt that won’t quit. You also possibly have never had a paying job or, at least, a full time paying job, other than the paycheck you earn as a newly minted resident.
After all, medical school takes up an awful lot of time, energy, and focus. It’s not uncommon for people to spend years in school focused on getting the grades to get into medical school, and then medical school certainly doesn’t allow for much opportunity to have a job. So how is one to build up a credit history or save for a down payment?
What would you say if we told you that, statistically speaking, doctors are one of the best gambles for a loan officer to take when it comes to selling a mortgage loan? In fact, a physician is ten times more likely to not default on a mortgage loan than a non-physician, according to Doug Crouse, a longtime physician loan specialist.
“As a general rule,” Doug said, “a physician will qualify for the same mortgage loan product as someone with a 700 FICO score rating.” A FICO score of 700 or greater is a good score. Most people fall between 600 and 750, so qualifying as if you have a score of 700 means you will generally get the most competitive interest rates on your loan.
The theory is that because the job of a physician is stable, in demand, and tends to pay well, they are in a position out of the gate to be responsible with a mortgage loan. Plus, physicians have likely already begun working with a financial services expert to manage their student loan debt to devise a systematic plan to pay it off (and if you haven’t, you really should), and so are ahead of the game financially, despite the debt.
And so, “as a general rule, a physician loan tends to come in at market rates, with no PMI,” said Crouse. “Because physicians have such a low default rate,” he continued, “with only .02% of physicians defaulting on loans versus the 2.2% default rate of the general population, physicians are, as a general rule, a good bet.”
Are mortgages different for physicians?
Physicians tend to have higher debt and less money available for a down payment because of student loans, which may sound limiting, but it’s still possible for a physician to buy a home.
For starters, there is that lack of PMI. “The prime difference between mortgages for physicians and mortgages for everyone else is the lack of PMI, which is a huge benefit,” according to Crouse.
What is the best physician mortgage loan?
While there is no specific loan called a “physician mortgage loan,” anyone with a medical degree who is interested in purchasing a home should seek out a lender who specializes in mortgages for physicians.
In fact, that is Doug’s specialty. “My wife is a doctor, and her friends are doctors and it became a natural fit for me to help provide mortgage financing to other doctors since I’m so familiar with the circumstances that doctors tend to face when seeking financing,” said Doug.
Benefits to physicians
While there is no specific loan called a “mortgage loan for physicians,” when you shop around for a lender, be sure to ask about how to qualify for the best physician mortgage loan. You will likely be able to enjoy:
- No PMI
- No down payment or a very low down payment, of typically 0-5%
- A competitive interest rate, despite the lack of a robust work history
- A loan that does not factor your medical school student loan debt into the calculation when determining your interest rate
There are other, less tangible benefits for physicians to take advantage of physician-centered loan products as well.
Opportunity to own a home
Home ownership is about more than a financial investment. It’s also about creating stability, putting down roots, and building a life.
Chance to maximize earnings
It’s always a good idea to find ways to make your money work hard for you. Otherwise, it’s easy to feel like you’re signing your entire paycheck over to your student loans every month.
Take advantage of tax breaks
Always be sure to check with your accountant, because tax laws can and do change year over year, but you may be able to deduct your mortgage interest, property taxes, or other aspects of home ownership, resulting in more savings for you in the long term.
Build wealth by owning property
While owning a home can be an emotional endeavor, never lose sight of the fact that buying property is also an investment vehicle. By building equity as you pay down the loan, and being in a position to ride out or take advantage of any fluctuations in the market, you can use your investment in property as means of building your financial portfolio to build wealth over time.
Stable monthly expenses
If you have a fixed-rate mortgage, your monthly principle and interest won’t change, ever. While your property taxes might fluctuate a bit year over year, there is a cap on how much they can rise, so you always know what to expect. Besides, if your property taxes go up, that means the value of your property is also going up, which is a good thing. Even if you have an adjustable-rate mortgage, you will still know what to expect from your monthly payment, as opposed to living in an apartment where your rent could go up year over year while you build zero equity in return.
Benefits to lenders
In addition to the low risk that lending to physicians offers, there are other benefits for lenders when it comes to loaning money to someone with a short or even nonexistent work history or low credit score.
Build relationships. Banking is about building relationships as much as it is about anything financial. Physicians are likely to be higher earning than most people, according to Doug, and will need more loan products in the future. Taking the low-risk on providing a mortgage to a physician is a great way to establish a professional, mutually beneficial relationship.
Generate leads. Physicians who are happy with the professional relationship they have established with their lender will refer other physicians to them.
Physicians are a good risk. Default rates for physicians are so low that lenders can afford to keep offering this product.
General information about physician mortgages
If you’re stressed about your lack of work history, don’t. Physician loans take into consideration that you likely just spent four years in medical school, then at least four more years as a resident, and probably don’t have much of an employment history.
While you may not have the world’s highest credit score, thanks to those student loans that seem to never go away, with a physician-specific mortgage, you can qualify for the best physician mortgage loan based on your contracted income. This means that as you finish medical school and sign a contract of employment for a position as a resident, you can use your offer letter for your new job to quality for the mortgage, even if your new job doesn’t start for another few months.
What about a down payment?
As a physician, you are generally eligible to finance 80-100% of the loan. This is a tremendous benefit because saving the traditional 20% of a home purchase price can take years.
“Outside of rural development or a veteran (VA) loan, most people cannot get 100% financing for a mortgage loan,” said Doug. With the best physician mortgage loan, you can generally borrow up to $750,000 with no money down.
Because of the statistics showing how much fewer doctors default on loans than the general public, most lenders can price physician loans the same as a mortgage loan with, say, someone he needs to make a 25% down payment and have an 800 credit score.
It isn’t easy to build credit, especially when it comes to applying for the best physician mortgage loan. One of our recommended lenders, Neil Surgenor stated, “It’s important to maintain good credit. Try to resist new purchases and new credit accounts prior to applying for a loan as increased balances and new inquiries and accounts will affect credit in the shorter term.”
What if you are a medical student or resident?
Medical students are generally are not interested in buying a home. They know that once they graduate, they will most likely move, and dealing with searching for a home is time-consuming and stressful. Medical school tends to be time-consuming and stressful as it is, so adding buying a home to the equation is not ideal.
But, going into residency is a different story. To qualify for the best physician mortgage loan as a resident, you need to earn at least $150,000 per household. Lenders know that most residents do not earn that much money, but if you’re married and have another wage earner in the household, you can qualify if you meet that income threshold together.
What to look for in a lender
As you now know, lenders like working with doctors to help them find the best physician mortgage loan. When looking for a lender, take the time to seek out a two to four potential lenders who work solely with physicians or who focus on physicians. They will be best positioned to help you make the most of the money you have available to get you into the home that you want.
Ask about closing costs in particular, because those can be negotiable. You may find that lenders specializing in physician mortgage loans are able to completely or partially waive closing costs.
What else should I know?
The best physician mortgage loans are geared generally towards doctors who have completed their residency, and not as much towards residents, fellows, or medical students. That is tied to the fact that qualifying for a mortgage loan typically requires a steady income. If you have a special circumstance, though, by all means reach out to a lender. Consultations will cost you about an hour of your time and not much else.
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