What is a Physician Loan?
Medical professionals often earn salaries far above the average American salary, and yet most come out of school with hefty student loans to repay. Such high debt loads would normally disqualify them from obtaining mortgage loans for several years. Thanks to Physician Loans, many new doctors, surgeons, dentists, veterinarians and even medical residents can buy a home without the wait.
What is it?
A Physician Loan is designed for medical professionals who are or will be earning very high salaries but still have huge amounts of student debt. Lenders would not generally be comfortable lending hundreds of thousands of dollars to a borrower who has not been in his or her current position long or who has six-figure student loan debt. And yet because they know medical professionals tend to be top earners and have proven to be responsible borrowers as a whole in the past, lenders have found it safe to make loans to these budding doctors.
The Pros and Cons
The advantages of Physician Loans include low- or no-down payment requirements. Lenders realize that medical professionals coming out of school probably won’t have much extra cash because of school debt, but that their earning potential is so high that they are likely to be able to keep up with their student loans and a mortgage loan. Not having to save up for a down payment means doctors can buy a home faster.
Another advantage is the Physician Loans do not require Private Mortgage Insurance (PMI) on loans with less than 20% down. This will save borrowers plenty of money each year in PMI premiums.
And of course, the biggest advantage is probably that traditional debt-to-income rules do not apply with Physician Loans. Student loan debt is not factored into the equation, allowing doctors to more readily qualify for homeownership.
The downsides are that medical professionals may get into a more expensive mortgage than they can truly afford. Once the student loan payments begin, the total debt load may be heavier than expected and default can result.
Also, there is always the risk that the first job does not work out and the borrower must move or find a new job quickly in order to keep up with the mortgage.
How to Qualify
The biggest factors to qualifying for a Physician Loan are credit score and non-student debt-to-income ratio. Borrowers need to have excellent credit, with scores above 700. And as with all loans, the better the score, the better the mortgage interest rate.
While student loan debt will not be counted in Physician Loan underwriting, all other debt will be considered. Those with large car loans or credit card balances will have a hard time qualifying for these loans. Debt-to-income ratios (not including student loan debt) should be 42% or lower.
And for self-employed doctors, lenders will want to see a longer work history, with two years’ worth of income statements.
For medical professionals just finishing school, the dream of homeownership may not be as far away as it might seem. With a Physician Loan, owning a home could be a reality now.