Lessons Using a Physician Mortgage Loan

I figured it would be appropriate to share my experience using a Physician Mortgage to buy a home during COVID-19.  We utilized this type of loan for a myriad of reasons which I will explain below.  When this post was first written we were a few short weeks from closing.  Being first time home buyers, as well as early career physicians who are expecting, was a tumultuous time to say the least. 

The process of buying a home is anxiety provoking, irrespective of life’s other expectations.  When we decided to approach home buying, we felt a physician loan was the correct choice for our situation.  It allowed us the ability to offer competitive pricing for the current housing market in our area while still having minimal money down.  This allowed us to utilize our supplemental income for eliminating our student debt and unexpected expenses (that did not fall into our emergency fund category). 

To begin, lets discuss what a physician loan is.

What is a physician mortgage loan?

A Physician Mortgage, or physician mortgage program, is a type of home loan offered by certain housing lenders.  This specific housing loan is normally aimed at high incomes earners.  The name is slightly misleading as it is available to dentists and others in the healthcare field. 

In a conventional mortgage, a buyer normally has to place 10-20% ‘down’ or more.  This means that to purchase a home conventionally you would have to save approximately 10 to 20% or more of the purchase price of the home in cash, prior to closing.  An example being if you wished to purchase a $500,000 dollar home, you would need anywhere between $50,000 -$100,000 in readily available funds prior to closing. 

Private mortgage insurance

The reason this concept is important is if you are unable to provide this amount of cash up front, you will need private mortgage insurance (PMI).  This is a type of insurance directed towards a home loan that insures against an individual defaulting on their mortgage payment.  If you can ‘pony-up’ 10-20%, then you have provided the bank with an amount that assures you are ‘safe investment.’  For individuals choosing to use a conventional mortgage who do not have the money available to make such a down payment, they are usually required to purchase private mortgage insurance.  PMI is a pricey expense that can be avoided in certain scenarios. 

You’re so special…

In a physician loan, the housing lender understands that the respective buyer (i.e. me, a young physician) has a high income potential (and commonly a mountain of medical student debt).  This puts physicians in a very special category in the eyes of the banks. 

Banks typically view physicians and dentists alike as individuals who have a temporarily low income (during medical school or residency/fellowship) that will eventually grow exponentially.  Given this reason, they recognize that if you are willing to forgo the initial down payment (i.e. the 10-20% needed for a conventional loan) and finance 100% of the mortgage, these potential customers will eventually quadruple their income (or more). 

This is a can be a safe investment as lenders are selecting from a cohort of individuals who will (hopefully) earn well above what is necessary to make their regular mortgage payments without defaulting. 

Why using a Physician mortgage loan was right for us

When my wife and I started seriously thinking about purchasing a home, we were determined to not let this process distract us from our primary goal of debt elimination.  However, as I started to research more into the process of home buying, I was overwhelmed by all of the information out there, so much of it conflicting. 

We turned to many well-known sources, including The White Coat Investor, for starters.  I read a few books written for first time home buyers and researched realtors in my area.  Realizing that you will likely be purchasing a home that is equivalent to your current student debt can be nauseating.  Why would I focus so heavily on paying down my student debt, while simultaneously purchasing a home of the equivalent price?!  Well, there are a few reasons. 

First and foremost, out of necessity.  My wife and I have been renters our entire adult lives.  As alluded to in the introduction of this post, we have never owned a home previously.  As experienced tenets, we learned the joys of renting, as well as the headaches.  We were ready for a change.  I wished to have a place our family could truly call “home.”  A dwelling where we could avoid moving every one to two years.  Our home needed to be a place with room to grow our family. 

Location, location, location

A major contributing factor was realizing we were prepared to put our roots down in our current location.  I do discourage buying a home until you feel confident you will be staying in an area long term.  I define long-term as at least 5-10 years.  After committing to our location, we felt more comfortable with our pursuit of homebuying. 

Secondly, we were in the process of growing our family.  We already were a household of two adults and two large dogs.  Adding a new baby into the mix seemed like too much for a small 2-bedroom house, especially if we expected family to frequent. We had no garage, no fenced in yard.  There was zero space.  We needed some growing room. 

Stay the course

Last, and definitely not least, our goal was student debt elimination.  We were determined to not let the process of buying a home effect our financial plan.  When we discussed the logistics of saving anywhere between $50,000 to $100,000 for a home, this was approximately 6 months to a year’s worth of student loan payments!  To save this amount we would have to divert a huge amount of our monthly student loan payments towards a down-payment.  Further, diverting money away from our large student debt would allow interest to work against us.  This could mean an accumulation of approximately $20,000-$30,000 or more in interest should we choose to save for a conventional mortgage.  This was unacceptable to us.  We had set a plan in motion.  Our continued motivation to eliminate our debt came from watching our payments chip away further into our principle. 

We decided that the financial options that a Physician Mortgage offered us, (i.e. 100% financing, minimal money down) would be most conducive with our financial goals.  Using this type of mortgage would allow us to continue to put $8,500-$10,000 away toward our student loans a month while still purchasing a house.

Which banks offer Physician mortgage loans?

This is a great question, and one that I do not have a perfect answer for.  What I can tell you is how I approached this question.  When beginning the pre-approval process for a physician mortgage, I started like anyone else would; I turned towards the internet.  I looked up all banks in my state who advertised a physician mortgage option. 

The soft credit pull

Here is a bit of advice, when applying for pre-approval from a lender to determine your potential interest rates, only apply to one lender first.  You have to make an account with a website, fill out required information, and apply for pre-approval.  They will then perform a soft credit pull, one that should not affect your credit.  Following these credit-pulls, you will have 14 days to shop around with other lenders without having to perform another credit pull.  This makes for a more streamlined process as other competitors can see the initial bank’s credit pull.  These subsequent banks you apply to (within 14 days) can offer rates based on that information. 

From here, I was able to get an initial interest rate from the first lender I applied.  I was then able to go to other competitors and ask for their interest rates.  If they were not competitive, I could show them competitors’ rates to see if they could match.  If they could not match rates, I would see if they would provide other incentives to compete for my business. 

From here, it was as simple as choosing the lowest interest rate with 100% financing on a loan that allowed me to buy a home in the COVID-19 housing market…eek! 

Pro tip to save you even more!

As an aside, there are other incentives that will help further decrease your interest rate.  These incentives are normally lender specific.  For many, banks will offer decreases on your fixed rate if you set up a checking/savings account with them.  Setting your mortgage payment to auto-draft can also decrease your rate.  Lastly, placing a certain amount of money in your new checking account (at closing) can often drop your rate too.  For our lender, this amount was $50,000.  The money did not have to stay in the account either, it only had to be present at the closing date.  Immediately following closing we were free to move that money right back into our emergency fund.  Basically we shuffled around 5-figures for about 2 weeks and likely saved ourselves tens of thousands of dollars. 

Cons of a Physician mortgage loan

There are some pros and cons to using a physician mortgage.  Let’s start with the drawbacks. 

First of all, lets state the obvious.  With a physician mortgage (or conventional mortgage for that matter) you are accumulating more debt.  Yes, there is an argument that owning a home is “good” debt, but debt is debt in my opinion and taking on more is not a decision to be made lightly. 

Secondly, a physician mortgage is a non-conventional mortgage.  For this reason, many banks see ‘no money down’ as risky, and often will offer higher interest rates.  Keep this in mind when shopping around as certain lenders may offer near equivocal interest rates for physician and conventional loans.  Some banks do not offer physician loans.  Depending on who you use for banking, you may have to open an account with another bank to utilize a physician mortgage loan. 

There are still associated costs during a physician loan transaction.  ‘No money down’ is slightly misleading.  You will need to have some money in cash regardless.  In our experience, we had to have approximately $8000 in cash to cover closing fees, contract lawyer fees, Home Owners Association (HOA) fees, etc.  Further, we were incentivized to (briefly) place $50,000 into our lender-associated bank account (see above). 

Lastly, I would add that some realtors are less familiar with the physician loan.  I encourage you to seek out agents who have experience with this process. 

Pros of a Physician mortgage loan

The benefits of using a physician mortgage include peace of mind, less upfront cost, and the freedom to focus on student debt reduction. 

Having the ability to continue to moonlight and put the majority of that income toward our student debt offered less anxiety with the decision to purchase a home.  We were searching for a home in an desirable location during an desirable time.  Not having to partake in a bidding war that would further siphon our savings was reassuring. 

Take home points

There is no way around it, buying a home is a time consuming and complicated process.  With a physician loan, we were able to achieve our financial goals for that year; buying a home and continuing down our path towards financial freedom.  As always…

Stay motivated!

The Motivated M.D.

I hope you enjoyed the article above.. Make sure to check our our article on Buying a Home During COVID-19. Please follow us on Twitter, and Instagram. Further, if you have utilized a Physician mortgage loan, let us know in the comments down below!

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