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Getting a medical degree is expensive in multiple ways.

Not only does it require four years of post-graduate medical school and a year-long residency, but, according to an Education Data report, the average total cost of tuition and expenses for medical school is $230,296, or just under $60,000 a year.

What results is — theoretically — an employable person who is hundreds of thousands of dollars in debt, has no savings, and often, if they are just out of school, no permanent job.

For this very reason, many conventional mortgage lenders deny newly-minted physicians who apply.

Once they find full-time work in their specialty of choice though, doctors are considered very reliable borrowers. They tend to have higher incomes than the general population, lower defaulting rates and carry less debt.

What is a physician loan?

In an attempt to reach doctors who are just starting out, banks and other lenders fashioned a specific type of loan called the “physician loan,” or “physician mortgage loan.”

They are desirable borrowers because of their future high earning potential and they are known to be reliable at repaying back their debts.

Physician loans are a niche mortgage product. They work exactly like most conventional mortgages — most, but not all physicians mortgage lones are adjustable-rate mortgages (ARMs) — the difference being that they are loans meant only for medical professionals.

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Qualifications for a physician loan

Given this is a specific loan for a specific subset of people, there are several requirements a successful applicant needs to meet to qualify for a physician loan.

A good credit score

Some say that your credit score needs to be 700, but Credit Suite reports that applicants’s credit scores need to be 720 or higher (which is considered a decent rating by most credit scoring companies).

In certain cases though, even if you don’t have a credit score that high, if you can prove to the lender that you have between six and 12 months of cash reserves, you still may be eligible.

Doctor of Medicine degree

Physicians looking for a loan also need to have finished their formal studies within the last 10 years.

Pay stubs

If you have an offer of work at a hospital, you may need your job contract to show proof of salary. If you are an independent contractor, you’ll need to show at least two years’ worth of tax returns to prove your income.

How do physician mortgage loans work?

They typically work the same way conventional loans do —beginning with an approval process, (which can take between 1-15 days, once you submit the required documents). But, even before you start your application, it is advisable to decide on the amount you think you can realistically afford to borrow and thus, owe and pay back.

Not all, but most physicians mortgage loans are adjustable-rate mortgages, that usually have a lower interest rate at first. Similarly to conventional, adjustable rate mortgages, you’ll pay a lower amount on your interest for a certain amount of time, then after that period elapses, your payments will increase.

Most lenders will only loan up to 97% (3% down payment) of a home’s value, but there are some mortgage providers that will loan 100% of the purchase price.

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Is a physician loan a good option for doctors?

A physician loan provides a flexible alternative for physicians who want to buy a home, but are struggling with their debt load, post-medical school.

It is a good option if you are aware of, and can accept the risks that come with signing up for one.

Pros

  • You don’t necessarily need a high credit score or low debt-to-income ratio to qualify
  • Little or no private mortgage insurance (PMI) required. PMI is what you typically have to pay the lender as insurance that you won’t default on your loan payments
  • Quick approval process
  • You can qualify and close on your new home within 90 days of starting your new job

Cons

  • Once out of the initial period, your ARM payments can be stiflingly high
  • Limited availability, depending on what state you live in
  • Interest rates are usually higher than with other types of mortgages
  • Low down payments can persuade you to buy a bigger house than you’ll be able to afford

Alternatives to a physician loan

If, after some research, the risks that go along with a physician loan are more than you want to take on, there are some options.

Conventional mortgage with a 20% down payment

Do you have enough cash for a 20% down payment on the house of your dreams? Then you may want to look into a conventional mortgage. It may offer the best in terms of rates and fees.

But, you should also consider that, if you have an outstanding balance on your student loan, that may factor into both the interest rate you receive on the loan, and the amount of your principal.

Conventional mortgage without a 20% down payment

The rates and fees for a conventional mortgage without a 20% down payment will be higher than if you had it, but may still be lower than the rates associated with a physician mortgage loan.

FHA loan

The Federal Housing Administration loan accepts applicants with credit scores as low as 550. As a rule, they carry higher interest rates than conventional mortgages and you will need to pay 1.75% in private mortgage insurance (PMI). You’ll also need to pay a separate monthly insurance premium.

ARM

An adjustable-rate mortgage might be the ticket for you if you want a lower interest rate upfront, but are interested in higher monthly payments to pay off the principal more quickly.

VA loan

If you are eligible for VA benefits due to former or current military service, you may be able to negotiate a VA loan. Famously, they don’t require a down payment or PMI. Interest rates on VA loans are generally consistent with FHA loans.

FAQ about physician loans

Do physician loans have lower interest rates?

Actually, the opposite.

Typically, physician loans have slightly higher interest rates than conventional mortgages, simply because of their debt-to-income ratio once they graduate.

It may be only half of, or one percentage point higher than a conventional loan, but it may be worth consideration.

Is a physician loan the same as a conventional loan?

Although both conventional and physician loans provide the same service —helping prospective homeowners to buy their houses —they are not considered the same because physician loans are only available to licensed doctors.

Given the unique place physicians have in the financial world (graduating from school with thousands of dollars of debt, with maybe a corresponding lower credit score, but with high earning potential) — physician loans also have higher interest rates, lower or no PMI, and may be authorized to a borrower with a lower credit score.

Can you refinance a physician loan?

Yes, you should be able to refinance a physician mortgage loan.

It depends on the lender you’ve contracted with, but as a general rule, once you have earned back a good portion of your equity (say, 20%), and paid down some of your debt-to-income ratio, you should be able to negotiate a mortgage with a lower rate.

Interested in seeing what the mortgage would be on that dream home you’ve been eyeing? Check out our Moneywise mortgage calculator.

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About the Author

Bronwyn Petry

Bronwyn Petry

Email Specialist

Bronwyn is currently part of the email content team for Moneywise. Before starting here, they freelanced for several years, focusing on B2B content and technical copy. Pre-pandemic, you could find them planning their next trip, but lately, if they're not at work, you can find them hanging out with their cat and dog.

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