Recent graduates of professional school are in a unique position. They usually have high amounts of debt and low savings. Not a good recipe to buy a home. Almost everybody with high debt and low savings will get denied for a traditional mortgage.
But one thing almost all professional school grads have is high potential income. So a number of banks offer Physician Loans (also called Doctor Loans) geared towards new professionals. Most of these loans are geared towards MD’s. But other health professionals, such as optometrists, can take advantage of them also.
Nuts and Bolts
I wrote about Doctor Loans in a previous post, but since I’m now a few years into having one, I wanted to revisit the subject. Here are the key aspects of a Doctor Loan:
- Requires little to no down payment
- Doesn’t require Private Mortgage Insurance (PMI)
- Doesn’t factor in student loan debt, which is usually high for professionals
- Will accept a job offer or contract as proof of earnings
- Available only to new grads, usually a maximum of 5-10 years out of residency or school
- Can have higher fees and interest rates than conventional loans
- Certain types of homes may be restricted
- Some banks might require the customer open a checking or savings account with the bank
It’s also important to know why banks would offer a Doctor Loan. Lenders are looking for customers who will make their payments on time and have a good relationship with the bank for years to come. Professionals usually have high income potential, so banks want them as customers for life. They will offer premium checking accounts and preferred rates for customers with mortgages.
My Take on Physician Loans
Now that we have the pros and cons out of the way, let me give you my opinion of the Doctor Loan. I decided to use the Doctor Loan because we wanted a house after renting for a couple of years but didn’t have the 20% down payment needed for a conventional loan. By not having at least 20% for a down payment I would have to pay Private Mortgage Insurance (PMI). This is just an extra monthly payment to the bank that would not even be tax deductible in our case.
After finally finding a bank that offered Doctor Loans for optometrists, I went thorough the usual ton of paperwork required for a mortgage. I’ve heard some horror stories from others who went through the mortgage application process, but luckily it went pretty smoothly for us.
I ended up selecting a no down payment Adjustable Rate Mortgage (ARM). While this sounds scary on paper, I believe it was the best decision for us. Doctor Loan interest rates are usually a little higher than conventional loans. Going with an ARM allowed me to get a rate in line with the average 30-year fixed at that time.
The interest rate on my ARM doesn’t increase until after 10 years, which is a few years longer than we plan to live in the house before selling. Even if we end up living there a little longer than 10 years, we can still handle the maximum possible payments so it shouldn’t be an issue.
Our plan is to build up enough equity in the house to eventually get a conventional loan on our next home. The Doctor Loan allowed us to take advantage of low current rates and have an affordable payment. I don’t regret going with the Doctor Loan, but if we had waited a few more years to build up enough of a down payment for a conventional loan, we might have scored a lower interest rate.
No Free Lunch
Not paying PMI and not having to fork over a large down payment sounds like a good deal, but the advantages of that can be erased if you decide to sell too early or you have to settle for a high interest rate.
So are Physician Loans for everyone? Absolutely not. Homes are expensive (taxes, maintenance, homeowners association fees etc). If you rush into a purchase too fast and aren’t ready for the upfront costs, then a Doctor Loan is probably not a good option. You would be better off learning the basics of home ownership while building up enough of a down payment for a conventional loan.
Mortgage lenders essentially work like see saws. They can offer low down payment and no PMI, but will have to increase the interest rate. If you want a lower interest rate, you should be able to offer a good down payment and maybe even pre-pay some of the interest.
There really is no one right answer. Deciding if a Doctor Loan is right for you depends on your income potential and how long you decide to live in the house, among other things. Run the numbers and ask those who have been through the mortgage process to see if it would be a good option for you.
If you need some more information, here is a great overview about student loans from Ricardo at Doctor Loan USA.