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 on a loan. Let’s go!
1) Physician Loans: A History Lesson
Special mortgage loan products for physicians 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 year, over 16,000 fresh-faced medical school grads with dreams of becoming a practicing physician were being matched to their residency and 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 loan 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 get a loan. 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 through special loan options.
That perfect storm created the doctor loan program.
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 the new product approved. But once implemented, the program was hugely successful. It filled a much-needed void for physicians, so the bank generated millions of dollars of new revenue by originating these new mortgages.
Competing banks took notice. They soon carved out similar programs.
Now that we understand the history and how we got here, let’s take a look at what the loans look like in general.
2) A physician loan…
- Requires physicians, residents and fellows to invest very little money for a down payment on the loan, usually 0-5% of the purchase price. Most banks offer 100% financing.
- 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 protects the lender in the event you default on a loan payment. It’s a waste of money—avoid paying PMI on a loan at all costs.
- 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 recent grad.
- Accepts your residency/fellowship/employment contract as proof of how much money you will earn 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 loan payment.
- Might require you to open an account with the originating bank to be eligible for a loan. Forcing you to open an account is a way for the bank to ensure you’ll be doing business other than your mortgage loan with them.
- May be used by residents, fellows or practicing physicians. This is the case at 90% of the banks that offer physician loans.
- Can be used for 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 have a credit score of 700-720+. If you have a credit score over 800, congratulations—the best rates and terms 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 be more than 38% of your income.Let’s move on to the other mortgage type so you can compare them.
3) Conventional conforming loans…
- Require a 3% to 5% down payment. For reference, 3% of a $200,000 loan would be $6,000.
- Require PMI (private mortgage insurance) if you don’t have at least 20% for a down payment or have 20% equity in the home.
- Allow you to qualify for a loan 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 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
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 this unique product for physicians..
However, not all banks offer the loan in every one of these areas, and each bank’s program will be unique in each state. Some banks even vary loan amounts, rates, and terms based on the particular city.
With that said, there are two national banks (Bank of America Physician Loans and Capital One Physician Loans) that can lend in all 50 states.
So which banks offer these programs for residents and practicing physicians in 2018?
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
You could call all these banks and see if they have a program in your state…or you could let Doctor Loan USA take the heavy lifting off your plate and connect you with a loan officer at one of those banks who specializes in physician mortgage loans.
6) These are your loan options
There are many mortgage program options. The main ones are:
Conventional Mortgages – These are 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 10-year fixed rate or 5/1, 7/1 and 10/1 adjustable rate mortgages (ARM). If you put in at least a 20% down payment, you’ll get a better interest rate and will not have to pay mortgage insurance.
Many banks offer options for you to pay less than 20% down. The disadvantage of putting less money into a down payment are higher rates. If you’re not able to put 20% down, the bank requires PMI.
As of November 2017, you’ll have to put down at least 3% for this type of loan.
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% for a down payment. They 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 no down payment, 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.
7) How to compare banks and their mortgages
It may seem daunting, 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 loan.
To compare banks and get the best rates, you need a systematic process.
First, research banks on Google and social media. Here are two articles to get you started:
Next, put together a list of banks that have loans that interest you, and call them. Ask for someone who specializes in working with physicians. If you don’t, you’ll likely get a general hotline attended by newbie loan officers. They may not know what a physician home loan is, even if their bank offers one.
If you find someone who knows the doctor loan 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. The loan estimate will be delivered to you within three days of submitting your application.
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 loan estimate will be. All you have to provide now is:
- Your name
- Social security number
- The address of the home
- An estimate of the home’s value
- The amount you want to borrow
You should get at least 3 Loan Estimates. If you are intent on saving more, double that number.
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 and find the best loan options. Use this handy mortgage comparison calculator to input your data and make a solid comparison.
8) How mortgage rates are determined by banks
Before we get into negotiating rates, it’s helpful to understand how banks come up with rates for their mortgages. 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 on their home loans. This leads to the strategic game that is determining loan terms and rates.
Things that influence loan 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 mortgage rates
This approach isn’t an exact science, but it will give you an idea of what the lowest rates are for mortgages on any given day. It will also give you a good idea of loan amounts, payment options, and rates, 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. If you submit a contact request, legions of hungry loan officers will bombard you with phone calls and emails. They 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
Do you know what the most effective way to get the best rate on a doctor mortgage loan is?
Have excellent credit and a high credit score.
Before you start shopping, you should pull your report from the big three credit score reporting agencies: Equifax, Experian, and Transunion. The easiest, most cost-effective way (it’s free) is to head over to Annual Credit Report. Don’t worry: pulling your own credit will never hurt your score.
You should look for mistakes and get your credit in order before applying for a mortgage. As long as you’re over 520—the lowest score you can have and still qualify for a mortgage—you’re in business.
If your score is less than 700, my advice is to wait, repair your credit and save for a down payment. Doctor mortgage programs typically require a credit score of at least 700 – 720 to qualify.
Next, you can—and should—negotiate everything: 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 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 busy lending officers working for banks who already have the best rates. 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.
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 deal 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.
Points: Should you buy down your rate? This is a personal decision and it depends on what your 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.
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.
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:
Lauren Perreault has sold hundreds of homes, having been full time in real estate for over 15 years. She is licensed in Oregon, Washington, and California. Her primary focus in these states is the Portland metropolitan area (which includes Vancouver, WA) and the South Bay area of Los Angeles county (Manhattan Beach, Redondo Beach, Torrance, Palos Verdes, and Hawthorne, CA). Her strong team in each location allows her to handle both these areas with a high level of service and professionalism.
Michigan – Norm Werner
Norm’s a great guy and an expert on the Milford, Oakland, and Livingston County areas.
Indianapolis – Kyle Williams
Kyle has a strong vendor network and extensive knowledge of the market in central Indiana.
Pennsylvania – Annette Yorks
Dayton, Ohio – Donald and Cyndi Shurts
Dallas – Bailey Funke
Bailey is 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.
Scottsdale, AZ – Nicole Hedges
Nicole is ranked in the top 1% of all real estate agents on Trulia.
Finally, if you are moving to another part of the country, give DRS Agent Network a look.
12) Buying a house isn’t a good idea for everyone
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 compelling.
If you are saddled with consumer debt and/or excessive student loans, you might want to pay off some of those debts before purchasing real estate, even with a physician mortgage loan. Check out this post on debt from Future Proof M.D. for more info and a few options.
13) You won’t be able to buy a million dollar house as a resident
Banks won’t lend you more than you can afford. Period. 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.
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) 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.
Thanks for reading all the way down here. I hope this guide helps in your quest for the best mortgage at the lowest rates.