Physician Home Loans: A Beginner’s Guide
So, you’ve finally completed your studying to become a physician. You’ve spent the last few years of your life pouring over books in the library, while you’ve seen your friends progress in their careers and become homeowners…
And now, you can’t wait to get on the property ladder yourself and purchase your own home.
You probably already have a solid idea of how much you want to spend on your home, and where you want to live… and the next step is to look at the various ways of financing your home.
If that’s you, you’ll probably have heard of physician home loans; and in this post, we’ll look at how these loans work… how they compare against other loans… and whether or not a physician home loan is right for you.
Physician Home Loans: What Makes Them Desirable?
Physician home loans typically offer a range of benefits that regular mortgages and loans don’t offer, and some of the major features include:
- Zero (or a very small) down payment required…
- No “PMI” (private mortgage insurance…)
- No chance of rate-growths on jumbo loans…
- A lending decision is made based on your signed employment contract…
- Student debts play a much lower factor in determining your eligibility…
So, in short, a physician home loan is a much more viable method of getting a mortgage, than were you to go down a conventional route of borrowing.
Who Can Take Out a Physician Home Loan?
While the exact requirements vary from lender to lender, qualified borrowers typically include someone who’s a medical resident, practicing (or soon-to-be) physician, WITH a signed employment contract), along with – occasionally – dentists, veterinarians, and other types of doctor.
Physician Home Loans VS Conventional Mortgages
Now that you have an idea of who’s eligible for a physician home loan – and why you may want to consider one, if you’re looking to purchase your first home – let’s look at why they’re an attractive option when pitted against conventional mortgages.
First off, let’s consider the three main costs associated with mortgages:
Interest: All mortgages will have interest attached – and this is based on the interest rate, the loan balance, and the repayment time-frame.
Closing Costs: Closing costs are a one-time fee, paid at closing, which is generally wrapped into the loan balance.
PMI: PMI is the monthly fee you pay, required – generally – until you’ve reached 20% equity.
Closing costs and interest rates tend to go hand-in-hand when it comes to cost. For example, you can lower the closing cost… but doing so will generally increase the interest rate, and vice-versa.
PMI can be avoided by putting 20% down up-front, although some loans – as is the case with most physician home loans – allow you to avoid PMI before you’ve reached 20% equity.
Of course, if you’ve no cash to put down, that leaves you with limited options – so what are your options for a mortgage without PMI?
The following is some of the most common ways to avoid PMI:
- Physician Mortgage Loans: 30 yr or 15 yr fixed rate
- Physician Mortgage Loans: 1-10/1ARMs
- Conventional 80/20: wide variety of terms available
- First mortgage (80%)- Traditional terms paired with a Second (5-20%)–Interest-only HELOC
- VA Mortgage (military eligibility required): 30 yr fixed rate
Physician home loans can carry a higher rate of interest or closing cost, but the major benefit is that it’s is extremely flexible to the pitfalls physicians are facing with school debt and logistics.
The physician home loan will likely be the most suitable option for you, if you’re planning on living at your new home for 0-7 years; if you’re buying with the intention of long-term living (staying there for 7 years or more), then the physician home loan with the 30-year fixed rate or the 80/20 option would likely be more suitable.
But, of course, this doesn’t include any closing costs – and that’s something you should bear in mind of course.
As you can see, physician home loans carry their own distinct array of advantages and disadvantages.
Generally-speaking, unless you’re planning on purchasing a home for short-term living (less than 5 years), they’ll tend to work out more affordable than conventional loans… and this becomes even more apparent when you’re able to put down an amount of cash upfront.
As always, it’s best to speak with a mortgage specialist who can walk you through the various options available to you – but the above should give you a solid understanding of the fundamentals associated with physician home loans, and whether or not one would be right for you.