Just because medical school graduates might be burdened with debt doesn't mean they won't get a home loan.
Savvy loan officers, like those at First Horizon, understand the unusual financial profile of the profession and have developed tailored home loans to meet the needs of doctors better.
That may surprise many graduating MDs or those finishing their residency. However, some bankers understand your situation better than you might think.
"One of the primary reasons banks are open to financing homes for new doctors is their income potential," says Tony Umholtz, a senior mortgage banker at First Horizon Bank. "Doctors have the ability to earn a high and steady income for many years."
In other words, these specialized loan experts are fully aware that up to nine out of 10 medical school graduates have student debt and that the average outstanding balance is $241,000.1 The bankers also know that doctors' pay tends to be significantly higher than average, with median annual earnings of at least $208,0002 versus less than $36,000 on average in the U.S.,3 according to government data.
The high earning potential over a long and likely recession-proof career is why bankers are willing to drop some of the more burdensome loan requirements for doctors and similar professionals, Umholtz says.
Learn more about some key differences in doctor home loans versus traditional real estate mortgages.
Low or No Down Payment Alternatives
Most traditional mortgage lenders require borrowers to make a down payment of between 5% and 10% on their home. The average is 6%.4
Physician loans can be available with no down payment. "We offer financing of up to $750,000 with no down payment," Umholtz says. Other competitors have different offers that may be lower or higher.
No Private Mortgage Insurance
With a traditional mortgage, borrowers must pay for private mortgage insurance (PMI) if their down payment is lower than 20% of the purchase price. PMI isn't an additional expense and isn't tax-deductible. That requirement is in place so that the mortgages conform to the standards of the government mortgage agencies Fannie Mae and Freddie Mac. However, PMI isn't required on any physician home loan as long as the property is the borrower's primary residence.5
Lower Documentation Requirements
Most mortgage applications come hand in glove with a slew of paperwork. Typically, that means providing recent pay stubs. For physician home loans, there is often no such requirement. For instance, a doctor who completed their residency in June and had secured a position for later in the summer would need to present a copy of their employment contract. "In that scenario, they would not need pay stubs," Umholtz says.
Residents and Fellows May Be Eligible
Once you've got your MD degree, you may get a home loan to buy a property during your residency or fellowship. The lenders use whatever the resident/fellowship salary is to determine the loan size. Spousal earnings can get included as well, Umholtz says. "We've been able to help some residents buy small residences that they were able to sell later at a profit," he says.
Your Debt-to-Income Ratio Can Be Higher
For most lenders, people with high debt levels relative to their income are considered highly risky borrowers. Often loan requests from such individuals get turned down. But physicians get the benefit of having their medical school loans excluded from the calculation if debt payments are deferred or in forbearance.6 That reduces the debt-to-income ratio, which often helps a physician qualify for a loan.
Interest Rates May Vary, But Your Credit Score Should Still Be Better Than Average
Interest rates are likely to be slightly different from traditional loans, sometimes higher, other times a little lower, Umholtz says. Even so, good credit scores are usually required of those applying for a physician loan. That means maintaining a FICO score of 720 to 740. (A score of 700 and above is considered good.)
They're Not Just for Newly Qualified Doctors
Physician loans are available to professionals with MD or DO degrees. However, some lenders also offer loans to those with DPM, DDS and DMD degrees.
While such products have been available for a long time – Umholtz has worked in this area for two decades – they were relatively unusual until recently. “Medical mortgages have become much more common in the last five to 10 years," he says.
Learn more about how a First Horizon Loan Officer can help set you up in a new home to accompany your new career.
Sources:
1 https://educationdata.org/average-medical-school-debt
2 https://www.bls.gov/ooh/healthcare/physicians-and-surgeons.htm
3 https://fred.stlouisfed.org/series/MEPAINUSA672N
4 https://www.rocketmortgage.com/learn/what-is-the-average-down-payment-on-a-house
5 https://www.nerdwallet.com/article/mortgages/physician-loans-flexible-mortgage-lending-for-doctors
6 https://www.nerdwallet.com/article/mortgages/physician-loans-flexible-mortgage-lending-for-doctors
