Last Updated on April 20, 2021 by Maggie Sutton
Maybe you’re just starting your residency and have decided it makes more sense to buy a home than to rent. Maybe you’ve just completed all your training and are ready to start your new career in a new city, including a new home. Or maybe you’ve out grown your home, or need to downsize. Whatever your reason for buying a home, finding the right home mortgage for you can be confusing. Homes for Heroes breaks down the details and pros and cons to the most common mortgage loans for physicians.
First, before we dive too deep into mortgage options, we first recommend determining how much house you can afford. Knowing what payment fits into your budget will help you determine which type of home loan could be best for you. This mortgage calculator is a great tool to estimate your monthly mortgage payment. Once you know what you can afford, we can cover the four main types of home loans: Conventional loan, FHA loan, VA loan, and USDA loans.
As a physician, chances are you qualify for more than one type of mortgage. Our Homes for Heroes mortgage specialists will work with you and your finances to determine which mortgage loan type is best for you. They can even save you $500 on lending fees just by being a physician.
When you work with our real estate specialists, you’ll get top service and help finding the best home for you. Plus, you’ll get our Hero Rewards after your closing, worth 0.7% which comes out on average to $1,400. There is no extra paperwork, fees, or stress to you for using our services. You’ll go through the same home buying process that you would without a Homes for Heroes real estate specialist, but this way you’ll get paid! Get more information from our specialists, with no obligation to sign up.
Conventional Mortgage Loans for Physicians
Conventional loans are the most popular home loan, with more than 50% of mortgages being conventional. Because they are less restrictive in what you can buy and qualifying requirements, there are a fewer number of required fees, and fewer terms to qualify make this a popular mortgage loan, especially for physicians. Conventional 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.
Benefits of a Conventional Loan:
- Buyers will typically receive a lower interest rate based on their credit score and amount of their down payment.
- There are no upfront funding fees.
- The amount you can borrow is generally higher than with government backed loans.
- Physicians can have a down payment as low as 3% of the purchase price.
Disadvantages of a Conventional Loan:
- Generally requires a credit score of 620 or higher.
- If your down payment is lower than 20%, you’ll need to pay Private Mortgage Insurance (PMI).
- Guidelines can vary from lender to lender, because they are backed by private institutions than can set their own terms instead of the government.
Also, conventional mortgage loans for physicians typically come with 30-year or 15-year term durations. When it comes to the interest rate options on these loans, there are two main types: adjustable-rate mortgage and a fixed-rate mortgage.
Adjustable-Rate Mortgage (ARM)
With an adjustable-rate mortgage (ARM), the interest rate you pay will change after a fixed period of time at the beginning of the mortgage. Initially, your interest rate will remain the same for the first 3-10 years of your mortgage. The exact length of time will vary between lenders. This initial interest rate is referred to as the “fixed-rate period.” The interest rate during this fixed-rate period is almost always lower than an entirely fixed-rate mortgage interest rates. This makes adjustable-rate mortgages attractive to buyers who don’t plan to stay in their house for the long-term, since they will pay less money in interest for their loan. If you are buying a home just for your residency, an ARM could be a smart possibility.
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 makes budgeting difficult. One month your payment could be $1400, the next it could be $1800. However, increased regulations following the 2009 housing crisis made most adjustable-rate mortgages come with a cap on how high your interest rate can increase in a given year.
Either way, the rate will continue to adjust based on a schedule predetermined in your loan agreement. Your mortgage lender will walk you through all the dates and terms for this home loan if it’s the best option for you.
With a fixed-rate mortgage, your interest rate will stay the same every month over the life of the loan. This makes it much easier to plan your monthly budget. Most people choose a fixed-rate mortgage. However, if you don’t plan on being in your home long term, an ARM might be a better option.
FHA Mortgage Loan for Physicians
FHA Loans are government-backed loans, issued by the Federal Housing Administration. A government-backed loan means that the home will go under government control if the borrower can not pay their mortgage. If the house goes into forbearance, the government will pay the bank back for the rest of the loan, and then take ownership of the home. This applies for all the remaining types of loan we’ll cover, which are all government-backed.
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, thanks to Mortgage Insurance Premiums (MIP) and the Upfront Funding Fee. Their low down payment requirement is also an attractive benefit of these loans. FHA loans are popular with many first-time home buyers for these reasons.
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 need to be higher.
- Home buyers can put down as little as 3.5% for a down payment. If physicians have a credit score of 500-579 they may still qualify for an FHA home loan if they are able to put down up to 10% for a down payment.
- Closing costs can sometimes be rolled into the mortgage payment, meaning you’ll pay less up front in a lump sum.
Disadvantages of FHA Loans:
- Those who choose a FHA mortgage loan 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 to assume the risk of your loan. Usually, this can be rolled into your mortgage, or you can pay it at your closing.
- All FHA loans must include Mortgage Insurance Premiums (MIP) for the life of the loan. That means that you can’t refinance and remove the MIP, unless you change the type of loan you refinance to. MIP protects the mortgage lender in case you are unable to pay the loan back. This insurance is a big reason why home buyers with lower credit scores and less cash to put down for a down payment still have the ability to purchase a house.
Generally, an FHA mortgage loans for physicians will cost a home buyer more money over the life of the mortgage versus a conventional loan, VA loan or USDA loan due to the higher interest rate and MIP costs. However, it still makes homeownership possible for someone with lower down payment funds or credit scores.
Of all the types of home loans, VA loans are the only mortgage exclusively for active and former military members and their families. Several service members who conducted medical duties during service continue their medical training and careers as civilians. Backed by the U.S. Department of Veterans Affairs, these loans offer great advantages to those who who have served in the U.S. Armed Forces.
To get a VA loan, you will need to show your lender a Certificate of Eligibility (COE). This shows your lender that you have been verified by the VA that you meet their requirements to obtain a VA loan. The primary criteria to qualify is you must have served in the US military for 90 days of active duty during war time, or 181 days of active duty during peace-time, or you are a surviving spouse of a military member who has also not remarried.
Benefits of a VA Loan:
- No down payment is required, as long as the sale price doesn’t exceed the appraised value.
- No Private Mortgage Insurance (PMI) premiums.
- There is a limit on closing costs, and closing costs may be covered by the seller.
- Interest rates are consistently lower than conventional and FHA loans.
- Your lender cannot charge a penalty if you pay your loan off early.
- You do not need to be a first-time home buyer to secure a VA loan.
Disadvantages of a VA Loan:
- You must meet VA loan requirements to qualify.
- VA charges a funding fee to cover operating costs. However, this fee is usually rolled into the purchase price.
- Your lender may have additional requirements a borrower must meet to take out a VA loan. Because the VA only guarantees 25% of a loan, lenders will typically have additional requirements. Be sure to discuss any additional requirements with your lender.
USDA Mortgage Loans for Physicians
USDA loans are probably the least common mortgage loans for physicians, because there is a cap on household income to be eligible. But, they are still available and an excellent option for physicians moving to rural areas.
USDA loans are not just for farmers; they’re actually named after the U.S. Department of Agriculture . USDA loans are intended to get people to move to rural areas. But, many small towns and even metropolitan suburbs with less than 35,000 residents qualify as rural with these home mortgage loans. These home mortgages for physicians can be very beneficial, as there is demand for physicians and healthcare workers in rural hospitals nationwide. If you live in or are moving to a more rural area anyways, you might as well take advantage of these loans!
USDA Loan Eligibility Requirements:
- You must meet the income-eligibility. The USDA loan is intended to make homeownership a reality for low to moderate income families in rural areas. The USDA’s low to moderate income guidelines vary by state. Note, the income eligibility is for the household income.
- Home buyer must personally occupy the dwelling as their primary residence.
- Home buyer must be a U.S. Citizen, U.S. non-citizen national or Qualified Alien.
- Must have the legal capacity to incur the loan obligation.
- Must be eligible for federal program aid.
Benefits of USDA Loans:
- It is possible to obtain a USDA loan with no down payment. You are, however, allowed to make a down payment if you wish.
- The loan terms offer competitive interest rates.
- The credit guidelines are flexible, with no minimum credit score. But, most lenders prefer a credit score of 640 or higher. This will vary by lender.
- Available in common fixed-rate terms like 30-year and 15-year loans.
Disadvantages of USDA Loans:
- There is an Upfront Funding Fee, up to 1% of the total financed amount, paid when you close on the mortgage. Typically this can be rolled into your monthly mortgage payment.
- There is an annual fee, which is 0.35% of the loan. This can also be rolled into your monthly mortgage payments.
- Must meet all the above USDA loan requirements to qualify.
- The home you’re looking to purchase must pass a strict inspection. This is to ensure the home is suitable for living, making it less likely you will go into default.
No matter what type of mortgage loan you choose, Homes for Heroes can save physicians money on your next home purchase. A hero working in the healthcare, law enforcement, military, firefighter, EMS, or teaching professions are eligible. Register with no obligation and you’ll be automatically matched with a real estate and mortgage specialist in your area. They will be with you every step of the way, taking the time to explain the process and answer any and all of your questions. Heroes who use our specialists to buy a home save an average of $2,400 in the process. It’s our way to say thank you for your service.