Brew up a great cup of coffee, pull out your notepads, iPads, MacBooks or whatever you prefer to take notes with—this post is epic and contains everything you ever wanted to know about physician loans. More importantly, you’ll find step-by-step information on how to research, compare banks and negotiate to get the best mortgage rates. Let’s go!
1) Physician Loans: A History Lesson
Special mortgage products for doctors are not new, but when you compare them with the modern mortgage market (popularized by insurance companies—not banks—in the 1930’s), they are relatively new products that have yet to make their way into the mainstream.
Sometime in the mid-2000’s, a forward-thinking employee at Bank of America (let’s call him Steve) honed in on an interesting strategy for attracting wealthy—or soon to be wealthy—clients to the bank.
Every single year, over 16,000 fresh-faced medical school grads were being matched to their residency/fellowship programs all over the United States. The majority of these new graduates had massive student loans. In fact, according to the Association of American Medical Colleges, the average medical student in 2015 will amass over $183,000 in debt. That figure is up 2% over 2014. If you look at this situation through a traditional lens, you understand why a recent graduate would never qualify for a traditional mortgage loan: too much debt and zero income history.
Most of these students also emerged into their adult life with the preconceived notion that renting an apartment or home is not a good idea. They would prefer to purchase a home, but can’t. Finally, Steve discovered that MDs have one of the lowest default rates (.02%) of any demographic, so it was relatively safe to lend them money.
That perfect storm created the doctor loan program.
Being an astute strategist and looking to add value to the bottom line, Steve brought this idea to the upper brass at the bank in Charlotte. It took a few months to consider the strategy, vet it out and get it approved. But once implemented, the program was hugely successful. It filled a much-needed void, so the bank generated millions and millions of dollars of new revenue by originating physician loans.
Competing banks took notice. They soon carved out similar doctor loan programs, complete with unique benefits, rates, and states where a resident could purchase a new home.
Now that we understand the history and how we got here, let’s take a look at what these loans look like in general.
2) A physician loan…
- Requires you to invest very little money down for a down payment, usually zero to five percent of the total purchase price.
- Does not mandate you pay for private mortgage insurance (PMI). With a conventional loan, unless you have over 20% equity in the house (what you own or paid for with a down payment), you have to purchase PMI. This is soley to protect the lender in the event you default on a loan payment. It’s a waste of money and diverts funds from your pocket to an insurance company’s account. Avoid paying PMI at all costs. It isn’t helping you in any way.
- Does not include student loans into your debt to income ratio. This is a huge deal, and one of the main reasons physician mortgage loans can be so beneficial if you’re a resident or recent grad.
- Accepts your residency/fellowship/employment contract as proof of how much money you will be making in the future. Usually, conventional mortgage underwriters look backward at your earning history in efforts to determine if you’ll be able to afford your monthly payment and not default.
- Might call on you to open an account with the originating bank. Typically, they’ll need you to set up an auto-draft for your monthly payment, which lowers the risk of default. Forcing you to open an account is also a way for the bank to ensure you’ll be doing business other than your physician loan with them, with the hopes of converting you into a lifetime customer.
- May be used by a resident or practicing physician. This is the case at 90% of the banks that offer physician loans. Make sure you inquire as soon as you can about this important distinction.
- Can be used on most property types (single family and townhomes), but in certain cities and regions, you may not be eligible to purchase a condo with a physician mortgage.
- Does not distinguish between a conventional mortgage loan and a jumbo loan. Most banks will charge higher rates and fees on anything over $417,000, which is considered a riskier product, thus the name “jumbo”. A point of note: not all banks that offer the doctor loan program offer jumbo loans.
- In some cases, lending guidelines may allow you to use money you receive as a gift for a down payment, cash reserves or miscellaneous closing costs.
- Requires you to have decent credit. Typically, you need to be in the neighborhood of 700-720+. If you have scores that are over 800, congratulations. You’re in a different league, and the absolute best rates and terms for physician loans will be available to you.
- Mandates that you have a loan payment to income ratio of less than 38%, which means your monthly payment can’t equate to more than 38% of your income. This can vary with lenders, though, and is something you should ask about for when interviewing different banks.
Let’s move on to the other mortgage type so you can easily compare the two.
3) Conventional conforming loans…
- Require 3% to 5% down. For reference, 3% of a $200,000 loan would be $6,000. That is just what it takes to get in the door and qualify for the mortgage. This does not include any fees or percentages you’ll pay your Realtor.
- Require PMI (private mortgage insurance) if you don’t put 20% down or have 20% equity in the home.
- Allow you to qualify with a credit score of 580 or above.
- Require three months of cash in reserve that could cover PITI (principal, interest, taxes and insurance) payments on the loan.
- Require proof of earnings history (W-2 forms, bank statements, and/or pay stubs). If you’re self-employed, you’ll need to present two years of previous tax returns.
- Use any debt (consumer, student, etc.) as factors in your debt-to-income ratios.
- Require a debt-to-income ratio of 45% to 55%. This just means your debts can’t equate to more than 45% to 55% of your income.
- Allow you to purchase condominiums in most markets.
4) Doctor loans are available in every state, but…
Forgive the long list: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming are all areas you can purchase a home in using physician loans.
Here comes the but…keep in mind not all banks can loan in every one of these areas, and each bank’s doctor loan program will be unique in each state. Some banks even vary rates and terms based on the particular city.
With that said, there are two national banks (Bank of America and Capital One) that can lend in all 50 states.
So which banks offer physician loans in 2016?
5) Complete list of banks that offer physician loans:
- Atlantic Coast Bank
- BancorpSouth Bank
- Bank of America
- Bank of Nashville
- BB&T Bank
- BBVA/Compass Bank
- Cadence Bank
- Capital One
- Citizens Bank
- Cohutta Bank
- Fifth Third Bank
- First National Bank
- Fulton Mortgage Company
- Horizon Bank
- Huntington Bank
- Lake Michigan Credit Union
- Regions Bank
- SunTrust Mortgage
- Washington Trust
Of course, this isn’t an entirely complete, up to date list. It would be impossible to keep tabs on every single lending institution and update this part of the article monthly, but this is a pretty decent attempt. You could call every one of those banks and see if they have a doctor loan program in your state…or you could let Doctor Loan USA take the heavy lifting off your plate and connect you with someone at one of those banks who specializes in physician loans and has years of experience working with people just like you.
6) These are your options
There are many alternatives to physician loans. Let’s take a look at the main ones:
Conventional Mortgages – These are your typical mortgages, and encompass anything that isn’t part of a specific government loan or special program. They come in many flavors: 30, 20, 15 and 10year fixed rate or 5/1, 7/1 and 10/1 adjustable rate mortgages (ARM). If you put at least 20% down, you’ll get a better interest rate and will not have to pay mortgage insurance. This is a good idea if you have the cash.
Many banks offer options for you to pay less than 20% down. The disadvantage of putting less money down are higher rates. If you’re not able to put 20% down, the bank will require you to pay PMI.
As of September 2016, you’ll have to put down at least 3% for this type of loan. Before the 2008 financial meltdown, there were many programs available that offered borrowers 100% financing. Those options have disappeared, many say with good reason.
FHA Loans – These loans are administered and regulated by the Federal Housing Authority. They allow for lower credit scores than conventional loans and require as little as 3.5% down. They also require private mortgage insurance (PMI) on all loans.
VA Loans – This program was created for US Military veterans and are guaranteed by the VA. They do not require a down payment or PMI, but there is an upfront fee (1.5% – 2% depending on your down payment) with most loans.
USDA Loans – Offered to rural, low-income borrowers, these mortgages require zero money down, are often cheaper than going the FHA route. They are sponsored and administered by the US Department of Agriculture and do require PMI.
State and Local Programs – These programs aim to help low to moderate income buyers purchase a home. Some are aimed at certain professions like teachers, firefighters and police officers. You can find out more and see if there is something available for doctors here. The last time I checked, there was not.
7) How to compare banks and their mortgages
It may seem like a daunting task, but putting the time into up-front research is well worth the end result. For example, on a $300,000 30-year fixed rate mortgage, reducing your interest rate by just .25% will save you almost $16,000 in interest payments over the life of your mortgage.
To compare banks and get the best doctor loan and rates, you need a simple, systematic process.
First, research banks on Google and social media. It is amazing how much information is available online. It’s overwhelming. Here are two articles to get you started:
You can also use this smart, well-designed tool by Credio to compare thousands of consumer banks. The website offers their proprietary “smart rating” as well financial stability scoring and general details. Many of the features are geared at people looking for a full-service bank, but we’ve found it helpful for general research. This is particularly useful if you’re not familiar with lenders who offer doctor loans in your state.
Next, put together a final list of banks that interest you, and call them. Make sure you ask for someone who specializes in working with physicians. If you don’t, you’ll likely get a general hotline attended by newbies. They may not know what a physician loan is, even if their bank offers one.
If you find someone who knows the program, and you like what you hear, ask them to put together a Loan Estimate (includes rate, annual percentage rate, closing costs and mortgage features). The LE form is the new form required by law as of October 3, 2015. It will be delivered to you within three days of submitting your application.
Please note: you don’t have to provide a ton of written information at this phase. However, the more information you provide, the more accurate the estimate will be. You’re also not to required to pay anything other than maybe a small fee for the lender to pull your credit report. Typically, this might be around twenty bucks. All you have to provide now is:
- Your Name
- Your social security number (so the loan officer can check your credit)
- The address of the home you plan to purchase
- An estimate of the home’s value (typically, the sale price)
- The amount you want to borrow (the home price minus your down payment
It’s worth noting that you should get at least 3 Loan Estimates from different banks. If you’re not terribly busy and are intent on saving the most money possible, double that number and get 6.
Don’t worry about your credit taking a hit. As long as you do all your shopping within a 45 day period, you’re good.
Finally, armed with that data, you can get to work comparing apples to apples. Use this handy mortgage comparison calculator to input your data and make a solid comparison for your doctor loans.
8) How mortgage rates are determined by banks
Before we get into negotiating rates, it’s helpful to understand how banks come up with the rates they charge borrowers for their home loans. This is a fascinating, complicated process. It’s not possible to say that interest rates are tied to one particular index, economic factor or governing body. It is possible to say that banks want to be as competitive as possible and at the same time as profitable as possible. This leads to the very strategic game that is determining their rates.
Things that influence rates include: the secondary mortgage market (how much investors are willing to pay for vast tranches—which are packaged bundles—of loans that are packaged up and sold as mortgage-backed securities), inflation rates, the price of US Treasuries, the LIBOR Bank rate and the Federal Reserve funds rate.
9) How to research physician loan rates
This approach isn’t an exact science, but it will give you a good idea of what the absolute lowest rates are for the mortgage loan market on any given day. It will also give you a good idea of rates in general, so when you finally talk to a lending officer about doctor loans, you have some context and knowledge on the subject.
The sites I’ve listed below always find a way not to include everything you’ll actually be paying. They caveat everything. I guarantee if you submit a contact request, legions of hungry loan officers will bombard you with tons of phone calls and emails. They want your business and have been trained with military precision to reach out until you tell them to stop (OK, that might be a slight exaggeration, but you get my point).
However, this is a pretty easy way to gather information for the next step, which is….
10) Getting the best rate will involve negotiation, there’s no way around it
Do you know what the most effective way to get the best rate on a doctor mortgage loan is?
Have excellent credit.
Before you start shopping around, you should pull your report from the big three reporting agencies: Equifax, Experian, and Transunion. The easiest, most cost effective way (it’s free) is to head over to Annual Credit Report. They will pull all three for you at the same time. The Federal Government authorizes this service. It’s safe, but watch out for ads that might confuse you into signing up for something you don’t need. Also, don’t worry: pulling your own credit will never hurt your score.
You should do what you can (look for mistakes, etc.) and get your credit in order before applying for a doctor loan. For some of you (everyone makes mistakes), fixing your credit in a short period isn’t possible. As long as you’re over 520—the absolute lowest score you can have and still qualify for a mortgage—you’re in business. Remember, the better your score, the better your rates and the more money you’ll save.
If your score is less than 700, my honest advice is to wait, repair your credit and save for a down payment. Physician mortgage programs typically require a credit score of at least 700 – 720 to qualify.
Next, you can—and should—negotiate everything on your physician loan: rates, fees & closing costs. At this point, you should have your three estimates. Call the lenders and let them know you’re shopping the loan to 3 different banks and are looking for the best deal. Be upfront, and let them know this mortgage is imperative to you and that you’re looking for the best deal possible. Don’t shy away from this part. It may seem awkward, but as long as you’re doing it respectfully, you have every right in the world to negotiate for yourself and your family.
In some cases, you may find that some lenders are off-put by your straightforwardness. This lender isn’t for you.
There are also many extremely busy lending officers working for banks who already have the best rates on physician loans in the market. The don’t need to lower their rates, or negotiate much because the rate is already low. These MLOs (mortgage lending officers) will be less attentive and less patient with negotiations.
It’s unfortunate, but sometimes this happens due to the large amount of inquiries they get. It’s up to you to decide if you are willing to play ball or not. Feel out the landscape and make the best decision you can.
Rates are relatively straightforward (but this doesn’t mean it’s easy) to negotiate.
Pull out your doctor mortgage Loan Estimates and tell the lender you have all 3 in front of you, and that you want to work with them but will only consider it if they will give you the best rate. Ask them what the best rate is they will give you, directly and without hesitation. If you’re upfront and get to the point quickly, most people will respect that and respond positively.
You can and should negotiate closing costs. Every fee on the lender side (app fees, doc fees, and prep) is negotiable, but that doesn’t mean the MLO will concede. How far and how hard you push is a personal decision. Just keep in mind that if you’re in a rush to close, you may not want to push as hard.
Being hard-nosed about a $65 charge might cost you your closing date, or even the entire doctor loan if the lender isn’t willing to concede. Third party fees, such as appraisals, legal/attorney fees, title insurance, recording, and taxes may be a little harder to negotiate on because many times the bank is just paying another vendor to perform a service and the bank has no control over how much they charge. You should at least ask. Never shy away from asking.
Points: Should you buy down your rate? This is a very personal decision and it depends on what your future goals are. We have an article on that very subject. It is geared towards buying down points, but the concept is the same.
Now that you know how to negotiate let’s switch gears to thinking about what you really want to do: find and buy your house!
11) Finding the perfect home
There are many guides online that can help you define what will make the perfect home for you. HTGV, Forbes, and Houzz have put together some nice ones. Do this first, because it’s important to narrow your possibilities and focus on homes that fit your criteria.
Once you know what you’re looking for, be prepared to do a lot of virtual house-hunting. Things have changed a lot since your parents drove around with their Realtor to look at every single house they were interested in. Be very glad about that.
Zillow is one of the most popular websites. It works exceptionally well, and the Zestimate feature has gotten more accurate over the years.
Trulia is another one of the heavies.
Redfin is one of the newer kids on the block, and is in fact, a new concept for how realtors get paid. You should look into it and see if it feels right for you. According to the site, you can save about 1.5% on your Realtor’s commission. Redfin only operates in about 75 markets.
Once you do some early digging and start understanding pricing and neighborhoods, you’ll want to find a Realtor. There are many firms out there who specialize in working with doctors. Here is a short list of the best:
Michigan – Norm Werner
Norm’s a great guy who has a jovial spirit and is very into history and cars. Oh, he’s also a 10 year veteran and expert on the Milford, Oakland, and Livingston county areas.
Indianapolis – Kyle Williams
Kyle has a very strong vendor network and extensive knowledge of the market in central Indiana.
Pennsylvania – Annette Yorks
Dayton, Ohio – Donald and Cyndi Shurts
Whether you are a resident or attending physician within the Kettering Health Network, Premier Health Partners or Dayton Children’s hospital, or in private practice and need help buying a home in the Dayton, OH area, give Don and Cyndi a shout. They’ve helped many people in the area and are among the top Realtors in Dayton.
Denver – Steve Charlette
Steve offers a lot of great expertise and writes consistently great content about the Denver real estate market.
Dallas – Bailey Funke
Bailey is a former nurse who now specializes in helping physicians relocate to the area. She’s part of a DRS Agent certified team in the Dallas/Ft. Worth area so she fully understands physician home loans and how they work.
Pittsburg, Pennsylvania – Kim O’Brien
Kim has extensive experience working with MDs who are using physician mortgage loans. She has the reputation of being the hardest working agent in the city and is the top performer on her team. Moving to a new city is stressful enough but Kim will help you find the best location in the ‘Burgh!
New Hampshire & Vermont – Hal Sheeler
If you’ve matched at Dartmouth-Hitchcock Medical Center, give Hal a shout.
Chapel Hill & Durham, NC – Michele Burris
Michele has helped over 100 physicians purchase property in Chapel Hill, Durham, and surrounding areas.
Chapel Hill & Durham, NC – Loci Zsuppan
Loci has lived in Chapel Hill for 2o years. He’s also a former mortgage lending officer so he has the added benefit of being very knowledgeable about the financing aspect of home buying, particularly with physician loans.
Scottsdale, AZ – Nicole Hedges
Nicole is an avid golfer and Scottsdale native who specializes in working with the medical community. Her top 1% ranking of all real estate agents on Trulia is a testament to her knowledge, hard work and commitment to her clients.
Finally, if you are moving to another part of the country, give DRS Agent Network a look. They have hundreds of agents in their network that operate in just about every market.
12) Buying a house isn’t a good idea for everyone
Let’s be honest. Sometimes, it just makes more sense to rent. If you’re not sure about where you’ll be in three years, rent. If you think you’re in a declining market, and there’s a possibility that home prices will decrease, rent. We’ve come up with a guide to help you weigh these factors: Getting a Physician Loan vs. Renting. The New York Times also put together a great interactive article called Is it Better to Rent or Buy?
In many cases, it makes more sense to buy. From a financial and psychological perspective, the benefits of homeownership are pretty compelling.
If you are saddled with consumer debt and/or excessive student loans, you also might want to pay off some of those debts before purchasing real estate, even with a physician mortgage loan. It all depends on the interest rates and terms. Check out this post on debt from Future Proof M.D. for more info and a few options.
Think about it and choose the path that is right for you.
13) You won’t be able to buy a million dollar house as a resident
You probably realized this, but I’ll say it in other words. Banks won’t lend you more than you can afford. Even if you’re a physician. Most residents earn somewhere around $45,000 a year, depending on the market and hospital. In this post, we help you determine more or less what you can borrow as a resident.
Correction: If you have a huge pile of savings before going into residency, then maybe you will be able to buy a million dollar home (I should edit my section titles to be more accurate).
In the meantime, if you are one of those hardworking souls (bless you) pulling way to many all-nighters in residency, check out this post from our friends at The Right Fit MD: 9 Tips for Getting Through Medical School on a Budget. It’ll help save some dough for a home or whatever else you’ve made a priority.
14) You need to educate yourself
Our physician mortgage loan FAQ will answer more of your burning questions about physician loans specifically, but it’s critical you learn as much as you can about the finance and home buying process. This is the biggest purchase you’ll ever make, and it pays dividends to know what you’re doing. At least know the basics. You’ll probably buy another house in your lifetime, and you can continue to build on your home buying knowledge with every purchase.
Heck. You may even be able to pass this knowledge down to your friends, family or children one day. It’s important stuff.
Please comment below and let me know if there are other things you’d like to know. If you spot any mistakes, point them out, and I’ll correct them.
Thanks for reading all the way down here. I hope this guide helps in your search for physician loans.