A home is arguably the biggest purchase you will ever make.
But wait, you may think. What about my student loans? Medical school is certainly expensive, and if you’re like most physicians in the United States, medical school set you back a hearty $33,00-53,000 per year.
That is no small amount of money.
A home is an asset, as opposed to your student loans, which is a debt. We are hard-pressed to think of an asset that is much larger or more significant than a home.
Not only will your home be an investment, but it will also be your home base and your personal sanctuary. Home ownership is a multi-faceted process that can provide a great deal of stability and personal satisfaction.
That’s not to say that buying a home, especially your first one and especially when you have a lot of medical school debt to contend with, is not stressful. It most certainly is. A home loan is typically thirty years long, involves interest, taxes, and many other expenses, as well as ongoing upkeep.
But, seeing as real estate is one of the most stable types of investments you can make, you would do well to learn more about the process and take steps towards purchasing your own home.
The key with buying a home, as with all major purchases, is to be an informed consumer. At this information-gathering stage, do not worry about your student loans, or lack of credit history, or even the cost of the home itself. Those things are important, but should not deter you from gathering more information.
This post, in particular, is all about the differences between Veterans Administration loans, known as VA loans, and physician loans. You may be eligible for one or for both, or for neither. Because there are benefits associated with both types of loans, be sure to read a bit further to learn if either of these common and competitive loan products are for you.
Why should a physician buy a home?
You may wonder why someone with such high student loan debt may wish to purchase a home. There is an even bigger question mark if you are a resident or fellow and know that you will most likely be moving in just a few years. Maybe you’ve read that if you aren’t going to stay in a place for at least five years, it makes more sense to rent rather than buy.
This is true for conventional home buying, for people who are not physicians. It’s true that when a consumer buys a home and sells it within a short period of time there are costs associated with closing the loan that are lost and not recouped even when buying another home right away. The rule of thumb is that if you know you won’t stay in the home for five year rule real estate, it might not be financially feasible to buy.
You have something going for you that most people don’t: as a physician, you are statistically less likely to default on your loan than the general borrowing population. This makes you an excellent risk for lenders. Because of this, most lenders are not only willing but happy to work with you on securing funding for a mortgage loan.
Lenders know that physicians have a higher than national average annual salary. They know that you are likely to remain not only employed but well-employed, throughout the course of your career. They also know that because your student loans are likely so high, you have more than likely secured advice from a financial services professional to investigate ways to best manage those loans. These things all add up to making you an excellent client for a mortgage.
As you begin your research, it’s important to remember that all mortgage loans are not created equal. There are different variables that affect how much, if anything, you need to put down as a down payment, and how much you will end up needing to spend every month.
Perhaps the best part of shopping for a mortgage as a physician is that this is one area of your financial life where your student loans will generally not come into play.
What is a VA loan?
Veterans Administration (VA) loans were designed to ensure that a loan product was available for members of the military and their spouses. These loans are a way for the federal government to back the military financially and offer a path to home ownership even if the military member is disabled or does not have a traditional work history or credit history due to military service.
Who qualifies for a VA loan?
While it is ultimately up to the VA to determine eligibility for a mortgage under these terms, these are the general qualifying criteria:
- The applicant must have served on active duty in any branch of the armed forces for a minimum of 90 consecutive days during wartime, or
- The applicant must have served on active duty in any branch of the armed forces for a minimum of 181 days of active duty during peacetime, or
- The applicant must have served in any branch of the armed forces for more than six years of service in the national guard or reserves, or
- The applicant is the spouse of a military member who died while on active duty or as the result of a service-connected disability, and who has not remarried.
To determine your eligibility, or to start the process to pre-qualify for a mortgage, you will reach out to the VA to obtain a certificate of eligibility. You do not need to have this certificate in hand to reach out to a lender, though. It helps to get the process going at the outset so that when it is time to need the certificate, you know it’s on its way.
Benefits of a VA loan
No or low down payment:
This is extremely helpful for someone who can afford to make monthly payments on a mortgage but who does not have the large lump sum of 20% of the purchase price of a home available to secure a traditional loan.
Of course, the downside of this is that the monthly payment will, of course, be larger than if a down payment was made because the homeowner must pay 100% of the purchase price of the home instead of the 80% that would remain after a down payment is paid. However, it can take many years to save up enough money for a down payment on a home, so having the ability to shop for a loan product without needing that lump sum up front can be the difference that someone needs between buying their home and having no choice but to continue renting.
VA loans also do not require borrowers to carry primary mortgage insurance, known as PMI. This insurance is a fee that lenders typically charge borrowers who put down less than the standard 20% for a mortgage. The fee is essentially pure profit for the lender and is best avoided by the borrower if at all possible. The one-two benefit of a VA loan allowing you to borrow up to 100% of the purchase price of the home and not have to pay PMI is tremendous.
There is a level of flexibility with VA loans that is particularly notable. When you hold a VA mortgage loan, you still have access to use all of the equity in your home (once you build it up, of course) towards future lines of credit to finance renovations or purchase another home, if you wish.
No income requirement to qualify:
A particular benefit of VA loans is that there is no income requirement to qualify for the loan. This is especially helpful if you are a resident and don’t have a very high salary yet.
You will, however, be expected to have stable, reliable income sufficient to cover your mortgage and other monthly expenses. This can vary for everyone. When you submit your application to the VA, they will calculate to see if you have enough left each month after paying your mortgage to cover typical monthly expenses.
You are welcome to use any lender you wish to provide a loan. Identify a few that serve your area (your financial advisor or realtor may have referrals for you), and inquire as to whether they are a VA-approved lender. You do not need to seek out a lender that only works with the military.
What is a Physician loan?
A physician loan is a type of loan product that some lenders have chosen to offer because of the benefits to both themselves and to physicians. As mentioned previously, physicians are a good bet when it comes to lending money. It is an odd fact of our finance industry that owing money often demonstrates that you are a good candidate to owe more money, providing you have a history of making timely payments to work down that debt. As a physician, you will likely have no trouble finding a lender who specializes in working with
Much like a VA loan, a physician loan has certain benefits not available to the general public. The main difference between the two is that VA loans are a formalized product requiring documentation of military status or association, whereas a physician loan simply requires a letter of employment verification, just as any conventional loan would.
Physician loans allow working doctors to apply for mortgage loans without factoring in your student loans. You will generally be able to make a low or no down payment and avoid PMI, just as with a VA mortgage. The main difference between the two is whether or not you have qualifying military status.
Who qualifies for a physician loan?
While physician loans are not a formalized, official product, if you are a physician, including veterinarian or a dentist, you are generally eligible for a mortgage with specialized considering given your very low risk of default.
Because of this low risk, lenders are not only willing to take a chance on you, there are often happy to work with physicians. They will look at your whole financial situation, and qualify you for the mortgage generally by excluding your student loans.
Benefits of a physician loan
No or low down payment:
Buying a home with low or no money down is a tremendous benefit. This will allow you to get into a home much sooner than if you had to save up the tens of thousands of dollars you might otherwise need to make a down payment.
Just like VA mortgages, physician mortgages also allow you to avoid PMI. That insurance is otherwise a fee that benefits the lender and no one else, so it’s always best to avoid paying it if you can. Having the cost-savings combo of low down payment and avoiding PMI will result in great savings to you monthly as well as over the life of your loan. That extra money you save from not paying what is essentially a penalty because you don’t have the money together for a down payment means you will be more likely to be able to afford the home in the first place.
Any money you have over every month can go towards your student loans, retirement accounts, emergency fund, or anything else you wish, rather than towards lining the pockets of a lender to protect them from the possibility of your defaulting, when we already know that, statistically, you are not likely to default on your mortgage loan.
Strong credit history not required:
Don’t worry about not having a long credit history, either. Most physicians don’t, given that you have spent many more years studying rather than working and so have had limited opportunities to work on building up good credit.
If you’re worried about your student loans giving lenders pause, don’t. Physician loans typically allow you qualify for the loan amount without taking your student loans into consideration.
Can I qualify for both types of loan?
Absolutely. It is entirely possible to be a veteran and a physician at the same time. According to lender and physician loan specialist Doug Crouse, VA rates “typically run 1⁄4 to 1⁄2% lower than the physician loan,” so on the surface, it sounds as though, all things being equal, you may look toward the VA loan to serve your mortgage needs.
But, keep in mind that there are fees associated with mortgage loans. VA loans also “have an additional funding fee of 2.15 to 3.3% that can be added on to the loan,” said Crouse, which “makes the loans fairly equal in cost.”
Crouse continued: “The exception being if the veteran has a 10% disability that is VA-related. Then the funding fee is waived, which makes the VA loan the better overall deal.”
The key is to know your options, talk to multiple lenders, and make the decision that is best for you. Every tenth of a point in fees here or there adds up quickly on a loan that runs into the hundreds of thousands.
Another difference between the two types of loans has to do with caps on how much you can borrow. In addition to requiring confirmed eligibility, VA loans will cap you at borrowing $484,350. If you wish to borrow more than that, you will need to “put down 25% of the excess,” explains Crouse, whereas, “most physician loans will allow you to borrow up to $750,000 with no money down. Of course, each lender may have slightly different rules, so it’s best to check with them individually when you find someone you are interested in working with.”
One other key difference between VA loans and physician loans is whether or not you want a traditional mortgage or an adjustable rate mortgage, known as an ARM. “Only about half of physician loans offer ARM loans,” explained Crouse, so be sure to ask about that specifically in terms of how the adjustable rate might benefit you.
If you’re worried it’s too good to be true, don’t
Lest you think that these terms are too good to be true, rest assured that VA mortgage loans and physician mortgage loans exist specifically to help individuals like yourself. The federal government and private lenders see opportunities to help the community as well as, quite simply, offer financial products that make good business sense and stimulate the economy. You have every reason to take advantage of these products.
To get started with applying for a physician mortgage loan, ask your realtor or trusted friend or family member for referrals. Seek out a lender who specializes in working with physicians. Be sure to have a signed employment contract in hand. You will likely be able to qualify based on the letter, even if your start date isn’t for a few more months.
Enjoy being able to borrow the money needed to finance your home at a competitive interest rate, working with a loan professional who respects and understand what you do for a living, and the challenges you face. Many people assume that physicians are wealthy given the high salaries that can be found with a quick internet search, but those same people making assumptions do not factor in the incredible amount of debt you had to take on to get your career started.
Yes, being a physician is a stable career field, and the salaries are high, but even someone earning a six-figure salary would do well to consult with professionals who can help you best look out for your financial health and help you make the right decisions to build a career, a life, and a home to call your own.