Physician loans can be a great alternative if you want to get started in house hacking, or simply buy a house. But… if they are so easy to get, are they really a good idea?
Why is there a specific loan for doctors?
The financial lives of doctors are a little bit unique. Applying for a regular mortgage can be quite challenging for a doctor who is early in their career. This is because the Debt-to-income ratio (DTI) will not look good due to massive student loans. It gets even more difficult when a doctor has just finished medical school and is not able to provide proof of income or employment.
Physician loans or “doctor loans” understand this predicament and offer special allowances for the unique circumstances of a healthcare professional. Banks recognize that they aren’t as bad a credit risk as their high debt-to-income ratio would suggest. Additionally, doctors have the potential to earn more money in the future and are less likely to default on their loans. In other words, they can bring valuable business to the bank. Taking this into consideration, lenders are willing to offer some advantages.
What are the advantages?
1. Minimum to Zero Down Payment.
Depending on the property, your credit score and the specific loan you are very likely to get 90-100% financing. Basically, you won’t be asked for a down payment.
2. No Private Mortgage Insurance (PMI)
Most mortgages require private mortgage insurance. By not charging for mortgage insurance, a physician loan frees up that money.
3. Relaxed DTI
Debt-to-income ratio is a percentage that measures how much you spend versus how much is coming in. Regular loans require that your DTI is 50% or lower. Young doctors find it difficult or close to impossible to achieve a 50% due to the high debt from their student loans. Lenders expect doctors to have debt so a higher DTI is not a deal breaker for a doctor’s loan.
4. Ideal for House Hacking
Normally, they can only be used to buy or refinance a primary residency. Which means you have to live at the home you are buying or refinancing. While this is a restriction, they are still a great option for house hacking. This is basically living in a property while your tenants pay your mortgage. In other words, the loan will be paying itself.
This doesn’t mean you won’t be able to use a physician loan for an investment property, but you will still need to live in the property at least for a year or two before moving out.
Let us talk some numbers on a $300,000 duplex. While using conventional loans, you have to put around 20% down, which comes out to $60000. Add the closing costs to it, and it is a very high amount to come up with early on in your medical career.
Now consider physicians loan with 0% down where you have to just pay the closing costs (there are ways to get around discounting the closing costs as well) which is typically 2-4%. So you have to come up with $6000 which sounds much more achievable when compared to $60,000. Your monthly mortgage expenses would be around $1500.
While house hacking, if you could rent out the other side for $1800, you have monthly cash flow of $300. Basically you will not have to pay a mortgage, you save on rent, make upwards of $3000 a year, and pay off your initial investment of $6000 in 2 years as compared to 20 years when using a conventional loan.
Only for doctors?
Not really. Several medical professionals can get one of these loans.
Certified Registered Nurse Anesthetists (CRNA)
Advanced Practice Clinicians (PAs, NPs)
Should I get one?
Early on in our careers, we’re taught that every medical professional needs to buy a house even before we can gain some financial stability. While I’m not against home ownership early in our careers, I think it makes even more sense when you make it an investment. House hacking can be a great alternative if you’re seeking financial independence.
It’s also a good idea to explore as many options as you can to get the best deal. Persistence is also essential. Around a month and a half into getting my property, the lender said they could not do the physician’s loan. It was in the middle of the pandemic last year and things were getting more difficult.
At that point, I only had two options. Give up the property or try some other lenders. I think I called at least 50 lenders in 2 days to try to figure out what was the best way to get into this property because I knew the numbers made sense, and at that point, I was invested in it a lot, even emotionally.
Make sure you’re doing it for the right reasons. If you know it makes sense, just go for it and be as persistent as you need to be to make sure you make it happen.
To find a list of banks and phone numbers we recommend visiting websites like Semi-Retired MD or White Coat Investor.