What is a Physician Home Loan?

Written By: Andrew Newhouse

A life goal that a lot of people have is to purchase a home. This will likely be the largest purchase you will make in your lifetime. Most people know they want to purchase a home, but aren’t familiar with a lot of options out there. Because of this, it is important to research the options available to you, to purchase this in the most efficient way. A majority of the clients that I work with are physicians but most of them are unfamiliar with a mortgage loan that is specifically tailored to them. This is a physician home loan.

What is a Physician Mortgage Loan?

First off, there are may names for a physician home loan. It has been called a doctor loan, physician mortgage, doctor home loan, etc. There are many names for this product, but they all are the same thing. Physician loans are a type of mortgage that enables physicians to make a down payment of less than 20% and avoid paying for private mortgage insurance (PMI).

There are numerous banks that offer physician home loans. Some of them are national, others are regional. If you have never heard of this product, you may be thinking why would the bank create a special mortgage product just for physicians?

It is pretty simple; physicians are ideal lenders. Banks recognize that physicians are unique compared to the general public and are attractive borrowers. They have job security, earn nice incomes, and pay their loans on time and in full. For these reasons, the banks like lending money to doctors. As a result, some banks offer a special physician mortgage loan to attract physicians as customers.

Conventional Mortgages vs Physician Home Loans

For the general population, a conventional mortgage is the typical type of loan that people secure. When it comes to homebuying, most people have heard that you need to have a 20% down payment to buy a house. Depending on the type of property you are purchasing (house, condo, etc.), this may not be entirely true. If you have a 20% down payment, you have plenty of options available to you. If you don’t have 20%, most banks will still allow borrowers to secure financing. However, they will require you to pay an extra monthly fee to cover the cost of private mortgage insurance, or PMI.

What is Private Mortgage Insurance?

Private mortgage insurance is insurance that you purchase to cover the mortgage loan balance in the event you default on your loan. Private mortgage insurance protects the lender, not the borrower. PMI typically costs an additional $100-300/month and is added into the loan package and usually paid through the escrow account. Sometimes it is built into the loan itself and doesn’t show up as an additional line item.

If you secured a mortgage with private mortgage insurance, the loan-to-value ratio on the home needs to be under 80% to remove PMI from the loan. If the PMI is built into the loan itself, then a refinance will be required to get the PMI removed from the equation. Because of this, if you are considering a loan that will require PMI, it is best to have the PMI as a separate line item, so it can be removed with an appraisal, rather than a refinance.

For young physicians, doctor loans can be an appealing product to help you achieve your goal of purchasing a home in a more efficient manner. As a young doctor that just entering practice, you may be able to comfortably afford the monthly payments associated with a mortgage, but you may not have the cash on hand to make a 20% down payment. A physician home loan would allow you to purchase a home, without having a large down payment and allow you to avoid PMI.

What are the Benefits of a Physician Home Loan?

There are a few benefits to using a physician home loan. A physician home loan can allow you to put less down on the loan, no private mortgage insurance, and a product that is fit for your profession.

Conventional home loans typically require you to a down payment of at least 20% of the home’s value. If you can’t put 20% down, you can still purchase the home but you will have private mortgage insurance (PMI) added on your monthly payment. Again, private mortgage insurance protects the lender, not the borrow.

With a physician home loan, you can put down anywhere between 0% – 15% (depending on the size of the loan and the lender). This benefits you as the borrow because it gives you the flexibility to put less down without having PMI, resulting in significant savings. With these savings you could focus on paying down other debts in your plan with higher interest rates or invest these dollars.

In a previous blog post, we walked through when it makes sense to pay debt down quickly and when a slower approach is recommended. Please review the 7% Rule in our blog post for a few weeks ago: Should I invest or Pay off Debt.

It will be important to speak to a mortgage lender and compare loan products to see what is best for you and your situation.

What is the Downside of using a Physician Home Loans?

One potential downside to using a physician home loan that is worth mentioning is that you may have a slightly higher interest rate than if you were to use a conventional loan. Although this could only be slightly higher, you could end up paying quite a bit more in interest over the life of the loan. Even though this interest rate is slightly higher, it still could be more beneficial product for you. Again, it will be important to reach out to a mortgage lender to see what type of loan would be best for your situation.

Can you refinance a physician mortgage?

Yes, you can refinance a physician home loan. There are a few reasons why it could make sense to refinance your mortgage. First, interest rates may have come down since the home was purchased, if you can lower your interest rate, it could save thousands over the life of the loan. Second, you can lower your monthly payment, if you have 20 years left on your loan, by refinancing to a 30 year loan, this would lower your month payment.

Can a Physician Loan be Used on an Investment Property?

This one is a great question. Typically, you cannot use a doctor loan on a vacation home or investment property. The physician loan program is designed for one’s primary residence only.

Summary

In summary, with most financial products, there is not one product that is best for all individuals. Physician home loans are not going to be the best product for every physician. For some, a conventional loan may be better suited. For others, a physician home loan will help them purchase a home with putting less down and avoiding private mortgage insurance. It is important to review the options available to you to ensure that you are using the best product for you and your financial situation.

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