Last Updated on February 27, 2023 by Luke Feldbrugge
Getting physician mortgage loans may seem counterintuitive, unless you are a new doctor, surviving residency, saddled with student loans and strapped for time. In that case, you may need help every step of the way. If you are further along in your career, you may be looking to move to a bigger house or a new neighborhood or even refinance your current mortgage. There’s help out there for you, too.
Knowing how much home you can afford is, of course, the first step. Homes for Heroes has over 4,500 talented agents and lenders who are committed to serving healthcare workers, including physicians and doctors. Then it’s a good idea to look at the types of mortgages available out there, what you can qualify for, and what will save you some money. The four types of loans we will examine are:
- Conventional loans
- FHA loans
- VA loans
- USDA loans
Conventional Mortgage Loans for Doctors
Conventional wisdom says that most doctors can get conventional home loans. Because income is a key factor, and physicians are typically high earners, it should be a snap, right? Not always. New doctors just out of school have a ton of student loan payments and not always good credit scores, so there are challenges.
Nevertheless, conventional loans are probably your first stop when you are looking at loans. They are the most popular home loan, with more than half of all mortgages coming from conventional lenders. They are less restrictive in terms of how much you can borrow and the qualifying requirements are pretty standard. Conventional physician mortgage loans are not backed by the federal government like the other loan types we will cover. Instead, conventional loans follow guidelines set by two private agencies: Freddie Mac and Fannie Mae.
Some Benefits of a Conventional Loan
- You can borrow as much as you need as long as you qualify.
- Interest rates are negotiable if you pay down points.
- Down payments are negotiable.
Some Disadvantages of a Conventional Loan
- Most conventional lenders require a credit score of 620 or better.
- If your down payment is lower than 20%, you’ll need to pay monthly Private Mortgage Insurance (PMI) for a few years.
- Each lender will set their own terms for a mortgage. There is no standard doctor mortgage package.
Conventional physician home loans typically come in two sizes: a 30-year or a 15-year term. Likewise, there are two types of rate options: adjustable-rate mortgages and a fixed-rate mortgages.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage (ARM) means the interest rate you pay will change after a fixed period of time. Initially, your interest rate will remain the same for the first 3-10 years. The interest rate during this fixed-rate period is typically lower than with a permanent fixed-rate mortgage. That arrangement is good for buyers who don’t plan to stay in their house for a long time. They will pay less money in interest for their loan overall. If you are buying a home just during your residency with the aim to upgrade to a new home later, the variable rates of an ARM could be a smart move.
After the fixed-rate period, your interest rate will adjust monthly based on the current market interest rate. This means your interest rate could increase or decrease based on the overall financial market. However, the changing interest rate is why ARMs can be risky to buyers, and they make budgeting difficult. One month your payment could be $1,400; the next month it could be a monthly payment $1,800. On the plus side, increased regulations following the 2009 housing crisis put a cap on how high the interest rate can increase in a given year with adjustable rate mortgages.
Either way, the rate will continue to adjust based on your loan agreement. Your mortgage lender will walk you through all the terms for this loan if it’s the best option for you.
With fixed rate physician mortgage loans, your interest rate will stay the same every month over the life of the loan. This makes it much more predictable and easier to plan your monthly budget. Most people choose a fixed-rate mortgage– unless you don’t plan on being in your home long term.
FHA Physician Mortgage Loans
FHA Loans are government-backed loans, issued by the Federal Housing Administration. A government-backed FHA physician mortgage loan means that the loan is insured and guaranteed by the feds. If you default on the loan, the government will pay the bank back for the rest of the loan. Then the FHA takes ownership of the home.
Federal loan programs, at least the ones we will be talking about, all do this: guarantee the loan so the private lender can give you the money with reduced risk.
FHA loans help increase homeownership by reducing credit score requirements for mortgages. Physicians and others with lower or less established credit scores can also qualify for these mortgages. Their low down payment is also an attractive benefit of these loans. FHA loans are popular with many first-time home buyers.
Benefits of FHA Loans:
- Physicians with a credit score of 580 or higher can qualify for a FHA loan. Scores as low as 500 can sometimes be accepted, although the down payment will increase.
- Home buyers can put down as little as 3.5% for a down payment. If you have a credit score of 500-579, you may still qualify for an FHA home loan, but you will need to provide a 10% down payment.
- Closing costs can sometimes be folded into the mortgage payment, meaning you’ll pay less up front.
Disadvantages of FHA Loans:
- You will need to pay an Upfront Funding Fee when you go through the closing process. This fee is 2.25% of the total financed amount. This is extra insurance for the government because they are assuming the risk of your loan. Typically, this can be rolled into your mortgage, or you can pay it at your closing.
- All FHA loans also include Mortgage Insurance Premiums (MIP) for the life of the loan. This insurance makes it possible for new home buyers, with lower credit scores and less cash, to get such a low down payment.
Generally, an FHA mortgage for physicians will cost you more money over the life of the mortgage than a traditional mortgage, a VA loan or a USDA loan. That’s because they have higher interest rates and MIP costs. Nevertheless, these loan guarantees make homeownership possible for someone with a low credit score.
VA Physician Home Loans
If you are or were in the military, VA loans are exclusively for you and your family. Backed by the U.S. Department of Veterans Affairs, these loans offer great benefits to those who are eligible–veterans and active duty service members.
One of the early steps in achieving a VA loan guarantee is retrieving your Certificate of Eligibility (COE). This shows your lender that your service has been verified by the VA and that you meet the requirements for a VA loan guarantee. Generally, you will be eligible if you have served in the US military for 90 days of active duty during war time, or 181 days of active duty during peace-time. There are, of course, variations on these requirements depending on your branch of the service, so it’s good to check them out.
Benefits of a VA Loan:
- No down payment.
- No Private Mortgage Insurance (PMI) premiums.
- There are limits on the closing costs you pay.
- Lower interest rates than conventional and FHA loans.
- It doesn’t have to be your first home.
- VA loan benefits are a lifetime benefit and can be used more than once.
- They are also available to the surviving spouses of military members.
Disadvantages of a VA Loan:
- You must meet VA loan requirements to qualify–you must have military service in your background.
- VA charges a Funding Fee to cover operating costs. It can, however, be rolled into the purchase price.
Your lender may have additional requirements and probably will. Because the VA only guarantees 25% of a loan, lenders will typically look at your credit score, DTI ratio and employment/income history.
USDA Physician Mortgage Loans
About 10% of the nation’s physicians practice in rural communities. If that’s you, USDA loans may be the right choice. USDA physician mortgage loans are intended to encourage people to move to rural areas. That can include a lot of towns and even metropolitan suburbs, because according to the USDA definition, 97 percent of the U.S is rural. Combine that with the current demand for physicians and healthcare workers in rural hospitals nationwide, and these loans may work well for you.
USDA Loan Eligibility Requirements:
- You might bump into the income-eligibility limits. The USDA loan is designed to make homeownership a reality for low to moderate income families in rural areas. The USDA’s income guidelines vary by state.
- You must personally occupy the dwelling as your primary residence.
- You must be a U.S. Citizen, U.S. non-citizen national or a Qualified Alien.
Benefits of USDA Loans:
- You can get USDA physician mortgage loans with no down payment.
- The loans have competitive interest rates.
- The credit guidelines have no minimum credit score. However, most lenders prefer a credit score of 640 or higher.
Disadvantages of USDA Loans:
- Like the FHA program, there is an Upfront Funding Fee–up to 1% of the total financed amount, which you pay when you close on the mortgage. This fee can, however, be rolled into your monthly mortgage payment.
- There is an annual fee, which is 0.35% of the loan. It can also be folded into your monthly mortgage payments.
- The home must pass a strict inspection to ensure the home is suitable for living.
Physician Mortgage Loans: Home for Heroes Can Help
No matter what type of mortgage loan you choose, Homes for Heroes can help physicians like you with your next home purchase. Simply sign up, with no obligation, and you’ll be connected with one of specialists to get things started. They will be with you every step of the way, taking the time to answer any and all of your questions. Heroes who use our specialists to buy a home get a Hero Reward check after closing–an average check of $3,000, and $6,000 if you buy and sell. It’s our way to say thank you for your service as a doctor and healthcare professional.