My Experience with "Physician Home Loans"

My Experience with “Physician Home Loans”

By #LifeofaMedStudent

“The Doctor Mortgage.” “The Physician Home Loan.” “The Professional Home Loan.” The names can vary, but the product is pretty similar. If you haven’t heard of it, I’ll explain a little more about what the product typically encompasses and what my own experience using them has been.

First, physician home loans are products designed to give residents and young attendings with little free cash (but stable jobs and large expected income) a way to get into a mortgage without putting much cash down, ignore their large student loan burden, AND simultaneously avoid private mortgage insurance (PMI). PMI is an additional cost usually added to a mortgage when the buyer makes a down payment of less than 20% of the total purchase price.

For a $200,000 home, this would mean at closing coming up with $40,000 cash – something that would be difficult for many residents, and maybe even new attendings starting right out. Likewise, many banks would be typically uneasy about loaning a mortgage to a person with a $50,000 resident salary and a student loan debt of $200,000+.

However, banks and lenders realized that despite the poor numbers on paper, residents and new attendings tend to be low risk to lend to. Our salaries go up considerably, our jobs are relatively secure, and we have a track record as a group of reliably paying. Thus, the doctor/physician home loan was born!

Typically, the loan requires <5% down (often zero) and deferred or income-based student loans are generally overlooked. It’s not all a free lunch, as the mortgage rates are typically higher than if one did a traditional 20%-down mortgage. While this can vary, a 0.25-0.5% rate increase is common. A few banks add additional fees at closing for their “doctor loan” but most do not – so be sure to ask about extra fees if considering a physician mortgage.

I have used a physician mortgage twice now, once as an intern and again as a new attending.

The first time, I was finishing up my transitional year and moving back to Indianapolis where I’d be completing three additional years of anesthesia training. I used a local lender from Huntington Bank. We found a home in a nice enough neighborhood, financed 100% of the $175,000 cost via a doctor mortgage, and even negotiated the closing costs into the sale. I don’t know if the interest rate was higher, or if we paid any extra in closing costs, because at the time, I didn’t even know to ask.

We walked into the first mortgage having paid absolutely nothing. We used a 5-year adjustable-rate mortgage (ARM), knowing it was unlikely we’d be in the house for more than 3-5 years and took advantage of the lower rate with the adjustable. (With a 5yr ARM, the rate stays consistent and is lower for the first five years, but then can fluctuate with interest rate levels after that).

Of course, buying a house that you already know you’re likely to move out of in less than 5 years is probably not the wisest choice. At that time, I knew little about finances or the true cost and risks of owning a home for a brief period of time. I detailed some of the experience in the post “Buy vs. Rent in Residency” but the end result was despite a LOT of work and maintenance over 3.5 years, we barely came out ahead of renting in total costs. Overall, I consider it a mistake, albeit not a catastrophic one. If we hadn’t lucked into a rising market, we almost certainly would have lost money compared to renting in a three-year window.

Fast-forward to the end of residency, and we are moving again to start my new attending job about 1.5hrs away. It’s also debatable if a new attending should buy a house right away (what if you don’t like the new job or the new job doesn’t like you?!) or even use a doctor loan (just wait for 6-months to a year and have a full down-payment).

Personally, I finally felt had a good grasp of our finances and we were moving “back home” – a place I would be very unlikely to leave unless there were huge, major issues. There is also a second hospital system in the town, giving me another employment option. Since I knew we’d almost certainly be there long-term, if we did find the right house, we decided to again use a doctor mortgage and only move once.

I knew that as a new attending in a low-cost of living area, I would be smart to buy a home for less than 1x my yearly salary. I knew with the doctor loan to make sure the lender I used didn’t charge extra fees and that if there was a difference in the rate, it should be around 0.25-0.5% difference or less. We did end up finding that “right house” and did go with the doctor loan again.

This time, giving the current low-interest-rate environment and likely rising rates, we went with a biweekly payment 30-year mortgage. The biweekly payments essentially make it a “26-year” mortgage. I considered a 15yr, but with interest rates rising, I wanted to lock in the low rate longer. I can still always pay the mortgage off early, but if rates/inflation really increase, it may make more sense to keep that low rate and invest instead of paying the mortgage faster. The biweekly/26-year mortgage was in my mind a nice hybrid of this.

For the physician loan, we used Chris Roberts of Region’s Bank (full disclosure, Chris was at that time a paying sponsor of the site). We financed 100% of the loan, again negotiated closing costs into the sell, and walked into another loan with basically zero cash spent at all. And actually, due to some negotiation on a few cloudy windows, we ended up with quite a bit of extra cash at close. Enough that, with Chris’s suggestion, we used a chunk of that to “buy down” the interest rate to exactly what it would have been if we’d done a standard 20% down loan. We still received about a $1000 check at closing.

A great mortgage rate, cash TO us at closing, and a home we could see ourselves in longterm – we were ecstatic! The process was incredibly easy, and the team at Regions did an awesome job – even making sure we could “close early” when the opportunity arose from the sellers.

And that is the biggest issue, I think, with the doctor loan – they are TOO easy. Seriously. You can get into mortgages at questionable times (any resident really, but especially residencies less than 5 years) and you can get mortgages for houses you probably can’t/shouldn’t afford the traditional down-payment too. This can lead to residents buying houses when they should rent (guilty) or new attendings buying way too much house at the start of their career.

The big problem with putting zero money down, it becomes difficult to withstand the costs of selling, especially if you are in the house for less than 5 years. With our first home, we may have slightly beat renting overall, but we were still very close to having to actually pay at the close of that mortgage just to sell the house. There was very little equity in the house and the small increase in value over 3 years just barely covered the realtor and closing fees. At a time when we had a lot of expenses moving, coming up with extra cash at closing would have been unpleasant.

About a year after our second home purchase, the equity in our home is about than $15,000-$20,000 and the realtor fees to sell it would be over $20,000 – plus closing costs, plus any negotiated inspection items. We’ve also already put about $10,000 in home improvement projects. Together, this would easily be a major financially losing position if we aren’t in the home a few more years or the housing market dropped – both risks that are certainly magnified by the doctor loan.

So in summary, the doctor loan can be a great product to avoid PMI/down-payments, speed up the home-buying process, or keep cash invested – when used in the right situation. With the right team, it is a smooth process that can make home-buying almost too easy. In the wrong use, it can lead to over-extending one’s financial reach, and potentially significant financial risk if a job change forces one to move after a short time and/or housing market decrease.

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