Using a Physician Loan for an Investment Property: What Are The Risks?

Physician mortgage loans are a great option for borrowers looking to purchase a primary residence with little to no money down. But can you use a physician loan for an investment property or second home? And if so, should you? Let’s explore.

Can you use a physician loan for an investment property?

A physician mortgage loan offers medical doctors, dentists, residents and other medical professionals the opportunity to buy a new home with up to 100% financing and no private mortgage insurance (PMI). It also comes with relaxed underwriting guidelines that make it easier to qualify for a mortgage.

For example, many physician mortgage programs exclude or treat student loan debt more favorably when determining your debt-to-income ratio (DTI). Additionally, they allow you to use an employment contract as proof of future income instead of requiring years of work history.

All of these benefits allow young physicians to become homeowners sooner than a traditional home-buying timeline using a conventional mortgage.

That’s the true intent of this type of loan program: purchasing or refinancing a primary residence.

But many physicians are interested in buying investment properties to generate income or purchasing a second home for a variety of reasons. Therefore, they wonder if they can use a physician loan to finance an investment property or buy a vacation house.

Most physician mortgage programs explicitly exclude investment properties or second homes from their eligible property list. However, several have exceptions.

With the right lender, you can use a physician loan for an investment property or second home. But that doesn’t necessarily mean you should.

Why financing an investment property with a physician loan is appealing

Here are some of the most common reasons young physicians might consider using a physician loan for an investment property or second home:

• Allure of being able to put 0% down for a multi-family property. For many, having the ability to buy an investment property with 0% down (or a very low down payment) seems like a great way to get started with real estate.
• Ability to buy a vacation home. Everyone wants that second home on the lake or up in the mountains to use as their escape.
• Option to strategically use your second home as a rental. The IRS has certain tax rules related to renting your vacation house if you’re interested in occasionally renting out your property.
• Plans to househack the mortgage. More young professionals are choosing to buy multi-unit properties (e.g., duplex, triplex or fourplex) with the intent of living in one unit while renting out the others.

Other reasons might include the desire to use the property as an Airbnb or rent out individual rooms within the home. In some cases, you might plan on only living in the house long enough to meet contractual obligations, and then turning the property into a rental.

Some of these reasons might seem sound on the surface. But it doesn’t automatically mean that it’s a good idea to use a physician loan for an investment property or second home.

Risks of buying investment property with a physician loan

Now comes the real question: Should you use a physician mortgage loan to finance an investment property?

First and foremost, it can be challenging to find a lender that allows you to use a physician loan for an investment property. And those that allow second homes will often have different down payment, loan terms and underwriting criteria for the vacation house versus a primary residence.

Beyond that, the financial risks of using a physician loan for an investment property might outweigh the potential benefits for many medical professionals.

Rental income isn’t guaranteed

With a 0% to 5% down payment, it can be difficult to consistently generate positive cash flow where the rent you’re bringing in exceeds the cost of the property itself. Overall, a lower down payment will mean a higher mortgage payment — and rent isn’t guaranteed.

Most recently, we learned that a global pandemic could wreak havoc on people’s ability to work and make rent. And in normal circumstances, renters still come and go for countless reasons. If you have a vacancy, you’re on the hook for covering the full monthly payment.

You have to manage the property

Being a landlord is a lot more time-consuming and stressful than many believe. Unless you hire a property management company, you’ll be responding to complaints and maintenance issues around the clock. You’ll also be responsible for finding tenants, collecting rent and monitoring the property.

At risk of mixing business with pleasure

Househacking via a multi-unit property can be a great way to cover your mortgage while also living on site. But you’ll need to go in with your eyes wide open and think like a landlord from the start rather than a homeowner.

This is easier said than done. Therefore, many end up mixing business with pleasure which can cost you money in the end. For example, you shouldn’t spend money “making a home” that caters to your own preferences. All decisions need to come from a business perspective to ensure the best financial outcome.

Lenders that offer physician loans for investment properties or second homes

Investment properties and second homes aren’t eligible for most physician mortgage programs. However, there are a few that have exceptions. Additionally, some lenders allow two-unit primary residences, which would give you the option to househack one side to cover a large portion of your mortgage.

If you’re interested in using a physician loan for an investment property or second home, here’s a starting point for where to look. Keep in mind the details of physician mortgage programs change frequently. Reach out directly to learn more about the lender’s property requirements and program guidelines.

Physician loan for an investment property

Frandsen Bank & Trust

• Financing options for primary residences, second homes and investment properties.
• States available: MN and WI
• Related: Frandsen Bank & Trust Physician Mortgage Review

Physician loan for multi-unit primary residence

BMO Bank, N.A.

• Financing options for primary residences, including two-unit properties.
• States available: AL, AK, AZ, AR, CA, CO, CT, DE, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI, WY
• Related: BMO Bank, N.A. Physician Mortgage Review

GreenState Credit Union

• Financing options for primary residences, including two-unit properties.
• States available: CO, IA, IL, IN, KY, MI, MN, MO, NE, OH, PA, SD, WI and WV
• Related: GreenState Credit Union Physician Mortgage Review

Huntington Bank

• Financing options for primary residences, including two-unit properties.
• States available: CO, CT, DE, FL, GA, ID, IL, IN, IA, KS, KY, ME, MD, MA, MI, MN, MO, MT, NE, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, UT, VT, VA, WA, WV, WI, WY
• Related: Huntington Bank Physician Mortgage Review

Physician loan for second home or vacation house

Northpointe Bank

• Financing options for primary residences and second homes.
• States available: AL, AK, AZ, AR, CO, CT, DE, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI, WY
• Related: Northpointe Bank Physician Mortgage Review

UMB Bank

• Financing options for primary and secondary residences.
• States available: AZ, CO, MO, TX, CA, UT, OR, WA, GA, FL, IL, ID
• Related: UMB Bank Physician Mortgage Review

Get more information about physician home loans

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