The Physician Home Loan Program
Getting a college degree takes time and money. And in many cases, lots of it. As college costs continue to rise, it costs more money than ever just to get an undergraduate degree. For those who are in the medical or dental profession, it costs even more. So much so that student loans are not as much an option as that of a necessity. But there is a loan program designed for the medical and dental professional that takes into consideration student loan debt as well as the future earnings of a medical or dental professional. It’s a special loan program designed to accommodate a high debt load and help this group to get into a home sooner rather than later and still provide competitive loan terms.
This special loan program is designed for more than just a working physician either at a hospital or in private practice. In addition to a physician who has been employed for two years, others who can qualify include licensed physicians who have completed their residency for at least one year and includes both residents and dentists. Borrowers may also be in a fellowship or in residence.
Recent statistics tell us newly graduated physicians carry on average student loan debt topping $200,000. Such individuals paying down these loans means they probably don’t have a large amount of savings, if any due to the tremendous costs of graduate and post-graduate degrees. Newly graduated physicians have very little employment history, a light credit history and very little money in the bank would have a very difficult time qualifying for any type of government or conventional mortgage loan under these conditions.
Knowing this, the physician loan program requires very little down and in some cases as little as 5-10%. And with the monthly student loan payment, debt ratios for physicians can be higher compared to the average borrower. The physician loan program helps with this debt load by eliminating the need for private mortgage insurance which keeps monthly payments in check.
Instead of looking for a two-year employment history and income tax returns the physician loan program can use an employment contract or verification from the employer how much the physician will earn and how the physician will be paid and for how long. Employment contracts in this fashion must state the physician will be employed by the hospital or doctor’s group for at least two years in most cases.
The physician loan program has different loan options much like other mortgage programs. Fixed rate loans are available in terms ranging from 10 to 30 years and most offer terms in five-year increments providing a 15, 20 and 25-year terms as well. Adjustable rate loans are also an option in the form of a hybrid loan. A hybrid is a mortgage with an initial fixed term such as 3, 5, 7 or 10 years before turning into a loan that can adjust once per year.
Which is better for the newly employed physician? That really depends upon how long the borrower intends to stay at the current job or at least stay in the same area. If the loan will be used to finance the property for the long term then a fixed rate is probably the better option here. Especially in light of today’s current market where interest rates are still near historic lows. 30 year fixed rates are readily available in the 3.5 – 4.0% range.
A hybrid is a good choice for the physician does not intend to keep the property for very long, such as only three or five years. A hybrid will provide a slightly lower start rate compared to a fixed rate of similar term. For physicians who will only be in an area for a short term such as a couple of years, it might be better to consider renting if extended employment is not confirmed.
Closing costs for a physician’s loan are as competitive as any other type of available mortgage product and without the need for a monthly mortgage insurance payment it can also be less expensive. A conventional loan with 10% down and no subordinate financing will have an additional mortgage insurance premium paid each month which can hamper borrowing power. FHA loans also have a monthly mortgage insurance premium payment but due to the lower loan limits associated with FHA loans, FHA loans aren’t typically widely used by practicing physicians.
It’s important to note that not all mortgage companies offer the physician loan so it’s important to work with a mortgage company with experience in processing, underwriting and approving a physician loan application.
Lenders will want to see at least two years of employment and if the physician owns more than 25% of a practice, lenders will want to see two years of tax returns both personal and business showing consistent year-to-year income. And, based upon how the physician’s group is legally formed, other documentation may also be needed. If there is no two-year history then the employment contract clause kicks in. For those not considered self-employed, then gross monthly earnings must be verified with paycheck stubs, W2s and bank statements.