Physician mortgages
Recently, a good friend of mine purchased a house using a physician’s mortgage. He was able to put 0% down and secure a 30-year “jumbo”-sized mortgage with a rather remarkable interest rate of 3.2%. Most importantly, there was no private mortgage insurance (PMI) required, despite the 0% down. These terms were quite favorable compared to my own conventional mortgage from 2016 (which I no longer have). I was intrigued and began looking into the world of physician mortgages.
I found that physician mortgages are not better per se, but are slightly different from conventional mortgages. The most important differences are in the PMI and debt-to-income (DTI) requirements.
Conventional mortgages want 20% down payment. If the buyer does not have 20% or does not want to put forward 20%, the lender will usually require a PMI policy to protect themselves, which can add hundreds of dollars per month to the mortgage payment. Typically, the PMI is canceled after the buyer builds 20% equity through payments, although this can take years. Because PMI is undesirable, having 20% down is recommended, but saving for the down payment is a major hurdle in purchasing a home for many people.
Conventional mortgages also tend to have more stringent debt-to-income (DTI) ratio requirements (usually cited at 36% or less), although some lenders accept up to 43%. The debt-to-income ratio is one of many factors used by the lender to determine whether the borrower is likely to be able to afford the mortgage payments. For most people, this is common sense: if you have a lot of other debt and your debt payments are a significant percentage of your monthly income, you probably cannot afford much of a mortgage.
Physician mortgages, however, forgo the PMI requirement even with down payments of less than 20%. Many physician mortgages also ignore medical school debt when calculating debt-to-income ratio. Finally, physician mortgages don’t even require much work history - sometimes, just the employment contract is enough. All of these factors make it much easier for a young physician to purchase their first home. Lenders are willing to relax their rules because physicians have much lower default rates than the general public, and even low income, high debt residents have potential for significant future income.
So, are there any downsides to getting a physician’s mortgage? For one, you have to qualify, and that means having a M.D. or D.O. degree and employment as a physician. Dentists and orthodontists may also qualify. Also, physician mortgages can only be used for your primary home, not rental or vacation properties. Assuming you qualify, I think there are a couple of main caveats to physician mortgages.
The reduced down payment and relaxed DTI requirements can easily lull a physician into buying a house they cannot afford. The lender’s approval is not an endorsement that the mortgage is a sound financial decision. The lender doesn’t serve you; they make money from you. They will happily allow you to purchase “too much house” while turning a blind eye towards your student loans. At the end of the day, they are not on the hook for your student loans which they ignored in the DTI calculations - but you are.
Physician mortgage interest rates are usually higher than conventional mortgages. It’s hard to find direct apples-to-apples comparisons as every mortgage is different, but physician mortgage interest rates seem to be about 25 to 50 basis points (.25 to .5%) higher. This is usually negligible on the monthly payment, but can add up to significantly more interest paid over the lifetime of the mortgage.
If you put 0% down, you start your home ownership with zero or negative equity. It takes much more time to build equity. This is especially dangerous for residents who may be moving after conclusion of their training. If you live in the home for just a few years, and the housing market is unfavorable, you can actually end up underwater when you sell the house.
So, who is the ideal candidate to get a physician mortgage? In my opinion, it would be a resident who has a family and needs a starter home, is close to graduation, plans to stay in place for at least 5 years, but whose current residency salary and student loans makes their DTI ratio unfavorable for conventional mortgage approval. Rather than renting while waiting for their attending salary to kick in, the resident can get approved for a physician mortgage and “jump-start” their home ownership process, and spend a year or two building equity instead of paying rent.
For attending physicians, DTI ratio is less likely to be a barrier for mortgage approval, because attendings significantly out-earn residents. Therefore, attendings may want to consider putting 20% down on a conventional mortgage instead as these likely provide the lowest interest rates. Note, however, that conventional mortgages are subject to size limits, known as the conforming limit. In 2020 the conforming limit is $510,400 in most of the country. This means that if you want a mortgage larger than this, you will be taking out a “jumbo” mortgage, subject to higher interest rates. Physician mortgages do not have this size restriction, which means that for “jumbo” size mortgages, a physician mortgage may have better interest rates than a conventional mortgage.
Overall, I think physician mortgages serve an important niche, but as with all financial products, it has pros and cons. Just because you can, doesn’t necessarily mean you should. Do your research, due diligence, and always compare different products and options. Happy investing!
