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3 Key Differences Between Conventional & Physician Mortgage Loans

By Jamie Richardson | April 8, 2022
  • Physician mortgage loans are a particular loan class exclusively available for physicians and medical residents. A few factors can make home loans more difficult than you would expect for a person who works as a doctor. 

    If you’re a physician or a dentist, you may have a high student loan balance as a newly graduated medical practitioner. Or, you might be still in and out of training. So, let’s look at three of those major problems you can solve by opting for physician mortgage loans

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    Down payment & PMI

    Firstly, we have the down payment, the initial amount you will pay for your new home while taking a regular home loan. Lenders generally ask for at least 20% of that home value upfront. It can be hard for physicians who are still in training to find a way to pay 20% of the total home value. 

    If you can't come up with a 20% down payment, your lender will consider you a risky borrower. In that case, they will likely charge you with PMI (Private Mortgage Insurance). It amounts to extra insurance on top of your loan payment, compensating your lender if you default on your loan. 

    Closing Costs

    You will also need to bear the closing costs to initiate and complete the loan buying process. It could be anything from one to two percent of the value of the loan amount you're applying for.

    These costs can significantly add up to your total costs. Also, health care professionals likely earn above the stipulated tax threshold. In such scenarios, you will not be able to avail these costs as a tax deduction.

    Debt to Income Ratio (DTI)

    Lenders generally prefer that your DTI ratio is in the high 30s or low 40s to consider you a good risk. But here's the problem related to student loans. 

    Many of you who have high federal loan balances are on an income-driven plan. Unfortunately, most lenders will not allow you to use that income-driven payment when calculating your debt-to-income ratio with a conventional loan. 

    Instead, they will look at your entire payment tenure. This period could stretch up to twenty-five years. They will use that final cumulative amount to calculate your debt to income. This amount can be significantly higher than full immediate repayment and push you out of the acceptable debt-income bracket.

    Physician Loan Advantages

    Under a physician loan, they will let you have a down payment as low as zero percent to five percent without having PMI on your home loan. They frequently charge a higher interest rate on a physician loan than you would find on a conventional loan in exchange for that benefit. 

    If you're a high-income earner, it’s highly unlikely that you will be able to deduct a portion of your PMI payment on your taxes each year. However, you can enjoy a much higher threshold by deducting the mortgage interest that you pay on your home loan. 

    Closing costs operate the same way you would find under a conventional loan. You will typically find the closing costs are a bit higher when under a physician loan. However, it’s still far less than the 20% down payment you must pay otherwise.

    As for the debt-to-income ratio problem under a physician loan, you will be able to use income-driven payments giving you a better opportunity to qualify as a more responsible bet for the respective lender. 

    To Summarize

    Even doctors can find it hard to arrange a down payment of 20% and closing costs with a regular home loan. Also, there is the risk of incurring PMI on your mortgage that is non-deductible. 

    A physician mortgage loan can solve pretty much all of that and help you get your dream home for almost just one-tenth of the initial funds you might require to arrange with a conventional loan.

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