Doctor and Physician Mortgage Loans – Are They Worth It?
Young doctors and physicians looking to buy a house are often faced with a few problems qualifying for conventional mortgages. They have little savings for a down payment, typically have a large amount of student loan debt, and depending on where they are in their careers, have low income (but the prospect of much higher income later).
With little hope of having 20% down for a conventional mortgage, can residents and young doctors even get a mortgage for a house?
There is a product that exists exclusively for residents and physicians in just this position, called the ‘Doctor Mortgage’, or ‘Physician Mortgage’. These mortgages are specially designed, and only available for young medical professionals.
So, should you jump on that doctor mortgage offer? Below we have two interactive mortgage cost calculators to help you determine the best mortgage for you.
First, a quick rundown of some terminology you may see shopping for a mortgage:
The Pros and Cons of a Doctor Mortgage
Doctor Mortgages – the “Good”
These doctor mortgages offer:
Very Low Down Payments: 0% is not uncommon, some may require 5% or 10% for very expensive homes.
No Proof of Income: You may only be required to show a contract instead of a paystub, making these loans very helpful for those doctors moving to a new town for a new job.
No PMI: Most conventional mortgages will tack on “PMI” (Private Mortgage Insurance) for loans that have less than 20% down. For other types of mortgages, this can add hundreds of dollars per month to the cost of your mortgage. Doctor’s mortgages do not have PMI insurance, but that comes with a cost…
Doctor Mortgages – The “Bad”
Doctor mortgages also have:
Higher Interest Rates: Expect interest rates to be at least 0.5% higher on doctor’s loans than conventional mortgages. Depending on your credit, location, and other factors it may be as much as 1.25% higher.
Requirements for a High Credit Score: Although lending standards are always changing, if your credit score is below 720, expect to be required to have at least a 5% down payment.
A Certain Debt-To-Income Ratio: Again, this will vary by lender, but expect to be required to have a debt-to-income ratio no higher than 45%. For example, if you earn $4,000 per month, your monthly debt payments (mortgage, credit cards, student loans not in deferment, car payment, etc.) can not be more than $1,800 (45% of $4,000).
High Initial Fees: Be on guard for very high origination fees for these mortgages. Many are simply rolled up into the cost of the mortgage.
Adjustable Rates: This is not true of every doctor mortgage, but be cautious if you are offered an ARM (adjustable rate mortgage). These are mortgages that may see their interest rates rise over time.
You will often see them referenced as a ‘5/1 ARM’ – This means that the rate is fixed for the first 5 years of the mortgage, and then can increase at a set amount each year thereafter. 3/1, 7/1, and 10/1 ARMs are also common.
As an example, if you are offered a 5/1 ARM at 3.75%, you will be guaranteed a 3.75% rate for 5 years, but at year 6 you interest rate will likely be higher. There is usually a listed maximum amount that the interest rate can increase each year, and an overall maximum interest rate on the mortgage as well.
ARMs are not necessarily bad. If you intend to be in the house for only a few years, or know you will have the ability to refinance with much better terms later, they may prove to be your best option. But if you are purchasing the house for the long term, they may prove very expensive.
Now that you know what to expect, how can you compare the cost of a doctor mortgage to a conventional mortgage?
Doctor Mortgage Cost Calculator – Are Physician Loans Worth It?
We have created several tools to help you find the true long term cost of a doctor mortgage. Our two interactive mortgage cost calculators are below. You can compare two different fixed rate mortgages or two different adjustable rate mortgages to see which has the highest total cost over the life of the loan.
For example, the fixed interest rate mortgage calculator below is prefilled in with the follow scenario:
A young Iowa doctor is looking to buy a $350,000 house. They are offered a ‘doctor mortgage’ that requires just $5,000 down and comes with an interest rate of 4.5%.
Their other option is to choose a conventional mortgage that will require them to put $35,000 down and pay $175 per month in PMI for the first 5 years of the loan. However, the interest rate is lower at just 4%.
Which mortgage option costs the most over the life of the loan?
You can see in the image above, even with the doctor choosing a non-doctor mortgage that has PMI, it is a cheaper option over the course of the loan. Even with an extra $175 payment for the first 5 years from PMI, the doctor would save $67,000 over the course of the mortgage by choosing a mortgage with a lower interest rate.
The calculator above is interactive. You can type your own values in the grey boxes above to find the best option for you.
Many residents and physicians are also presented with adjustable rate mortgages. The mortgages may tempt you by offering seemingly low monthly payments at the onset of the loan, but over time interest rates rise and can add hundreds of dollars per month to the cost of the mortgage.
Below we have another mortgage cost calculator, but this one for adjustable rate mortgages:
Like the calculator above, this is fully interactive. If you have a mortgage offer in front of you, type the numbers in the grey boxes above to determine the true cost of your mortgage over time.
Are Doctor Mortgages Worth The Cost?
Ultimately, a doctor’s or physician’s mortgage is going to be more expensive than a conventional mortgage due to the higher interest rate.
But there are many more variables in your decision to buy a house. If you have credit card debt, or little to no retirement savings, your money may be better used paying down credit card debt with 20% interest than going towards a conventional mortgage down payment.
Or, you may be in a location where rental prices are very high, making the cost of home ownership much more reasonable, even with the higher cost of a doctor mortgage.
Alternatives to Doctor Mortgages
Some alternative options to doctor mortgages:
FHA Loans – These loans are guaranteed by the federal government, so they typically offer low interest rates and low down payments (as low as 3.5%). However, if you take advantage of the low down payment requirement, you will be required to pay PMI for the life of the loan.
Conventional 20% Down Mortgages – These mortgages will often provide the best terms for borrowers, but require a 20% down payment. If you can afford the down payment, and calculate that making a large down payment is in your best interest, this will very likely be your best and cheapest option.
Second Mortgages to Cover Down Payment – Here you can secure a separate loan to provide money for a 20% down payment. This will result in higher total monthly expenses, but may save you over time by eliminating PMI payments.
VA Mortgages – These are offered only to veterans through the Department of Veteran Affairs. The loans often come with low down payment requirements and very good interest rates. If you qualify, this should likely be your best option.
Not sure which option is best for you? That’s what we are here for!
Contact us today to get help from a fiduciary, fee-only financial planner: