A doctor mortgage can help physicians secure homeownership early in their careers. It makes purchasing a home possible despite six-figure student loan debt. It also doesn’t require a large down payment, making it an easier and more affordable route to homeownership.
But are physician loans a good idea across the board? Just because it’s a solid option for many physicians doesn’t mean there aren’t risks or potential drawbacks.
Let’s explore the “dark side” of physician home loans that are often overlooked or completely ignored.
What is a physician home loan?
A physician mortgage loan offers up to 100% financing with no private mortgage insurance (PMI) to qualifying medical doctors, dentists and residents. Depending on the lender, other medical professionals or high-earning professions might also be eligible.
For example, physician assistants, nurse practitioners and lawyers might qualify for some programs and be excluded from others.
The top benefits of using a physician loan include:
- Zero-percent to 10% down payment options with no PMI.
- Flexible underwriting guidelines that treat student debt more favorably and allow an employment contract to serve as proof of future income.
- High loan limits that generally range from $750,000 to $2 million or more.
In most cases, doctor loan programs are used for early- to mid-career physicians within 10 years of completing their original residency or fellowship.
Why a doctor mortgage is appealing for many physicians
This type of loan program is designed specifically with physicians in mind — which is why recent medical school graduates, residents, fellows and interns can often qualify despite having little savings, huge amounts of student debt and a lower income.
In fact, many physician mortgage programs allow residents and new physicians to buy a home before their employment start date.
Many young healthcare professionals can fast-track their homeownership dreams and maximize borrower perks compared to a conventional mortgage. In this case, you’ll need to meet strict underwriting criteria and provide a 20% down payment (or be willing to throw away money on PMI).
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7 Reasons you shouldn’t get a physician loan
After breaking down the benefits of physician loans, it’s easy to understand why so many young physicians take advantage of this special home financing opportunity. But before jumping at the chance to buy a home at zero down and no PMI, consider the potential drawbacks.
1. You might be tempted to buy a bigger home
Because lenders view physicians as low-risk borrowers overall, you’ll likely qualify for better interest rates and higher loan amounts than the general public. Additionally, the underwriting process for physician loans is more generous than a traditional mortgage.
So, what’s the problem?
Access to higher loan amounts is a slippery slope, especially when you see an offer for $1 million or more. Just because you qualify for a larger loan amount doesn’t actually mean you can afford a larger monthly mortgage payment.
2. You could end up with an underwater mortgage
Although we’ve recently seen huge increases in home purchase prices across the country, no one can truly predict the future of the housing market. What you pay for your home today might not be what it’s worth later down the road.
When you buy a home with 0% down, you’re making a huge investment and commitment that provides no equity out of the gate. With an unstable housing market, you could easily end up with an underwater mortgage where your loan balance is higher than the home’s value. This could prevent you from selling or refinancing your home in the future.
3. You might make poor decisions about your student loans
Each physician mortgage lender treats student loan payments differently when determining your DTI. Some lenders might exclude your student debt entirely, while others only overlook deferred student debt.
Furthermore, some lenders might use a modified calculation. For example, one that’s based on your income-driven repayment (IDR) monthly payment or a small percentage of your loan balance.
This quickly becomes a problem if you’re taking the advice of a mortgage lender when making decisions about your student loans. To be clear, they aren’t experts on student debt. Their job is to close the physician mortgage deal and earn your business as a long-term banking customer.
It’s best to figure out your student loan repayment strategy before going down the home-buying path. Our team of student debt experts can help you make sound decisions about your student loans while taking a holistic approach to your overall finances, including plans to buy a home.
4. You might pay higher fees or higher interest rates
Because you won’t provide a 20% down payment or pay PMI with a physician loan, you might incur higher loan fees (e.g., closing costs) or a slightly higher interest rate. A physician loan could end up being more expensive than a conventional loan or other alternative low down payment program.
Depending on the timing of your home purchase, you can expect physician loan interest rates at about 0.5% higher or lower than conventional rates.
Ask your lender for a comparison of fees and interest rates for a physician loan versus a conventional loan, as well as any other mortgage products you’re interested in. Keep in mind that you can often negotiate closing costs or find alternative third-party service providers.
5. You might not have options for fixed interest rates
Many physician loan programs only offer adjustable-rate mortgage (ARM) products, which can be problematic for home buyers interested in a traditional 15- or 30-year fixed rate. However, if you plan to only be in the home for several years, an adjustable-rate with a lower interest rate might be beneficial.
Keep in mind that common adjustable-rate loans, such as a 5/1, 7/1, 10/1 or 15/1 ARM, function as a hybrid product where there’s a set period of fixed interest that later transitions to a variable rate.
6. Your physician loan could have unusual terms
Home loans often come with surprises for the average borrower, and physician loans are no different. Sometimes you won’t know until the last second that it requires a biweekly payment or realize that you’re signing up for a 25-year loan instead of 20 years of repayment. Go through your loan agreement with a fine-toothed comb and ask for clarification when needed.
7. You might not be financially ready for homeownership issues
Being able to purchase a home with little to no money down sounds like a great deal. But owning a home costs a lot more than many people initially believe. It can also be mentally, physically and emotionally draining once you come face-to-face with the amount of maintenance and repairs that are required.
As a medical resident or young physician, you already work extensive hours in a stressful environment. Coming home to broken appliances or a busted pipe that you’re 100% responsible for fixing or replacing might not be ideal at this stage of your career, where you’re barely home anyways.
Physician loan alternatives
If homeownership is your goal, it’s worth exploring other types of home loans to determine which mortgage program benefits you the most. Consider the following:
- VA Loan. Has down payment options as low as 0% down for eligible veterans and active duty servicemembers.
- FHA Loan. Requires at least 3.5% down and comes with lower credit score requirements.
- Conventional loan. Requires a 20% down payment or PMI payments and has more strict underwriting criteria.
Other down payment assistance and loan programs exist. Do your homework and weigh the pros and cons of each mortgage option against your physician loan benefits.
Bottom line: Are physician loans a good idea?
Physician mortgage loans offer many benefits to residents and young physicians who haven’t had time to build up their savings or pay down their student debt. They’re easier to qualify for thanks to a more relaxed underwriting and approval process. But these perks can come at a cost.
Explore your mortgage loan options and have an honest conversation about the realities of being a homeowner before diving in.
