WHAT IS A PHYSICIAN LOAN?
A physician loan or “doctor loan” is a mortgage specifically for practicing physicians and residents that usually requires zero or very little down payment without requiring the payment of a private mortgage insurance (PMI). With most other loan types, lenders often want borrowers to have a 20% down payment or in lieu of that, pay a mortgage insurance for anything less than 20%. Physician loans give you the privilege of having the best of both worlds, not having to put down 20% and not having to pay mortgage insurance. Generally they are used to purchase a residential home and not for an investment property.
WHY THE NEED FOR A PHYSICIAN LOAN?
Doctors are often at a disadvantage when applying for a regular mortgage early in their careers due to their usually high debt-to-income ratios. (DTI) Many physicians come out with unusually high DTIs due to your years of medical training and accumulating student loans. But you have a high earning potential and considered trustworthy professionals who will not default on a loan so some lenders are willing to take a chance on you.
One advantage of a physician loan is that it can help you buy a house sooner than you could have, such as during your residency years. Consider this, you can rent a house for the three or four years’ duration of your residency and at the end of residency, you just pack your bags and turn over the keys to your landlord. You have nothing to show for the years that you lived there and all the rent you paid. You have no equity or stake in the home you lived in for three, four or even more years if you completed a fellowship program. But if you had taken a physician loan with a zero downpayment, you would have built some equity during those years of residency. After that, you can sell the house or use it as a rental property for the future. That could be the first of your real estate investment portfolio. Remember, real estate always wins in the long run.
IS THERE A DOWNSIDE TO PHYSICIAN LOANS
You should expect that your interest rate will be a little higher than normal prevailing rates. The lenders have to make a little money, after all.😊 And sometimes, physician loans start as an adjustable rate mortgages (ARMs). ARMs are exactly how they sound, rates are not fixed but adjustable and tied to a certain financial index. Generally, adjustable rate mortgages are more risk-oriented than fixed-rate mortgages but they have their uses. A good rule of thumb is to refinance out of a physician loan or an ARM loan when it no longer serves your needs.
There are other low or no down payment loan options for you to consider such as an FHA, a USDA, conventional or even a VA loan for military veterans. Each of these have their advantages and disadvantages. Together with your lender, you can figure out which will be the best fit for you.
