One of the biggest financial decisions that physicians and dentists make involves buying, building, or renovating a house. If you’ve gone through this process, you know there are a lot of decisions, documents, and details to navigate, which can quickly become overwhelming. On top of that, lenders have different requirements or options they offer. The decision that you make is going to be one that's going to take up a big spot in your budget for years.
Financial planning consists of the six decisions people make with their money. Physicians need to make decisions as to how they borrow, spend, and protect their money when it comes to finding a lender in the home buying process. Mortgages are an effective way to borrow money and finance a home.
There are many types of mortgages that have different requirements for qualifying. We’re going to talk about the doctor mortgage loan programs, how to qualify, the benefits of getting pre-approved, and the importance of your credit score. There is an abundance of banks that offer their own doctor mortgage loan programs. (White Coat Investor has made an extensive list where you can click on an interactive map to find the banks in your state.)
Managing Partner of Spaugh Dameron Tenny and host of the Prosperous Doc podcast interviewed Jason Watkins of Suntrust Mortgage about lending options for doctors. Give this episode a listen for their detailed conversation.
The first step in getting approved for any loan product is to get pre-approved with a loan officer. This enables us to review your credit report including score and credit history. We’ll also look at your current income, employment and assets to ensure you meet all of the program requirements. It’s never too early to get pre-approved – if you are considering buying a home, then it’s the right time to get pre-approved. The minimum credit score for our doctor loan program is 660.
In addition to a credit score, banks also want to know these factors to give a pre-approval:
To emphasize an important first step, the best first step is to get a pre-approval and have a discussion with your loan officer. A pre-approval does not cost or obligate you to anything but will be a chance to see if you are eligible to purchase a home OR it will give you time to get on the right path to home-ownership.
Whether a physician has pristine credit or complicated credit due to owning a practice, what should you be aware of in terms of how credit affects eligibility for a mortgage?
Credit is a significant factor that dictates what type of financing a bank can offer you. Your credit score can impact whether someone can qualify for the physician loan program. It also determines the amount of down payment that is required, if any. A common occurrence for lenders is when buyers check their credit score on their credit card or Mint app and it shows an 800 credit score. It's important to know the credit score you see is not using the same credit model that most lenders use. For example, your app might show an 800 credit score, but a lender’s model would show you have a 730 credit score.
Regardless of where you are in the process, if you think you're going to buy or refinance a house anytime in the next year, it's never too early to get pre-approved. The reason for pre-approval is to see what you qualify for and if you need time to improve your credit score before going through the loan process.
Let’s say someone's credit score is low, a lender might notice one of their credit cards is maxed out or there is a high usage relative to their credit. Even if this person pays off their credit card every month, they could improve their score by paying it off before the end of your statement cycle. A lender’s credit score model prefers to see a zero balance over a maxed-out credit card because the amount of credit being used versus the amount of credit available is a critical factor.
There are 5 different criteria used in computing a credit score:
To further the example, the credit card user gets a ding for using 95% of their available credit. Two ways to solve this problem and improve their credit would be either pay it off before it’s due or ask your credit card company to increase your credit limit. This would lower the usage rate.
The doctor loan program offers flexible financing, so it requires as little as 10% to 0% down. For doctors coming out of training, who maybe haven't had a chance to save for a down payment yet, this might be an attractive option. If you do have the funds, but would rather build an emergency fund, invest for retirement or pay down some student debt, you can still purchase a home with no money down. Regardless of the down payment, there's no mortgage insurance, which can help you save on your monthly payment. This program also allows doctors to qualify using future income. If you're completing training and you've got a new position starting within 60 days of that date, you can qualify using your future income.
Just to compare, a conventional loan requires the buyer to pay for private mortgage insurance (PMI) if they put down less than 20 percent of the home’s purchase price. A conventional loan also requires the use of current income to qualify and counts student loan debt, while the doctor loan program allows flexibility when it comes to qualifying with their student loan payments.
For a physician or a dentist (MD, DO, DMD, DDS) who qualifies for the program, a doctor loan may be a great option to purchase or refinance your home. The interest rates, flexibility, and underwriting in a doctor loan program can offer great benefits to those seeking to refinance or purchase real estate.
Mortgage insurance protects the lender in the event that they are unable to make your mortgage payments, which can significantly increase your monthly payment. If you're going to put down less than 20% of the house price, you're subject to paying mortgage insurance.
If you were to choose a conventional loan – a $400,000 house, with 10% down, you'd probably have mortgage insurance about $200 to $250 per month. Whereas these additional mortgage insurance costs do not exist in a physician loan program.
Rates are very complicated, but to give you the easiest answer, banks are competitors against one another. You can compare it to buying a stock where prices fluctuate depending on the market. Similarly, gas prices fluctuate due to supply and depend, as well as the time of year. For the most part, any lender that offers a similar product, their rates are pretty comparable to one another. There's going to be days where one lender may be priced a little ahead of another because the bank is trying to compete by offering you a loan at the best price.
When you see headlines about the government or the Federal Reserve lowering rates, there is a common misconception where people think this affects mortgage rates. When the Federal Reserve lowers the prime rate, they're lowering short term interest rates like your home equity line or credit card. Whereas mortgage rates are long-term rates, 30-year loans, 15-year loans, or 20-year loans. This means there is not a direct correlation between rate cuts and mortgage rates.
Again, the great thing about the doctor loan is the flexibility in underwriting, and part of that, related to income, is we will use future income to qualify you. But that future income does have to start within 60 days. And that is very helpful for somebody coming out of training, out of residency or fellowship. They're going to complete training on June 30th, and maybe they have a new contract to start a position on September 1st with whoever employer they've agreed to work with. They can close on a new home up to 60 days prior to that start date, so that gives them time, post-training, to move into their home, get settled, qualify for that new home, using their new income to do it, and then have a couple of months between training before they start back to work.
You need to close within 60 days, but that doesn't mean you can't start shopping for a house or applying for the loan back in March or April or May. That's when the home buying season is blossoming. It’s okay to go ahead and start looking as early as March, April, May, depending on what income you need to qualify. If we need that new income, then we're going to do a pre-approval for you with the assumption that your closing date will be within 60 days of you starting to earn that income.
Banks do allow gifts, but there are restrictions when it comes to the gift amount, who can give the gift, and more. For the physician loan program and most conventional loans, the giver must be a relative. Federal Housing Administration (FHA) loans differ where the giver can include family members, friends, labor unions, employers, and charitable organizations can make contributions toward a down payment. Banks often require a down-payment gift letter to explain who the giver is and what the money is for.
A gift can be given to the buyer to satisfy future mortgage payments or it can be used for the down payment. When you close on a house, banks need assurance you have enough money in the bank to pay that mortgage. For doctors coming out of residency or fellowship, they may not have enough cash built up for the monthly mortgage payment. As mentioned above, the physician loan program requires 10% or 0% money down, therefore a gift could be beneficial for you to put in your checking account to show you have enough stability to pay the bills, even with low income during training or no income during the transition from training to practice. In this case, it may be better to have a couple thousand dollars in your savings account versus a couple thousand dollar down payment to cover other moving costs and especially if you have not built a solid emergency fund yet.
The benefits of the doctor mortgage loan might seem quite attractive to you by now, but you must be aware of other features or requirements you likely won’t see on a bank’s website where they are advertising the program.
As you can see in the six money decisions graphic shown above, the type and amount of mortgage you decide to acquire absolutely affects your big picture financial plan. Will the cost of your house allow you to save for your kids’ education or reach other financial goals you have in mind? Of course, your student loan repayment agreement can be a huge factor in the amount of house you can afford. Though the physician mortgage program offers flexibility with your student loan payment plan, it’s not advisable to allocate all your cash flow to paying off your education and house debt. To confidently make decisions with your money, it could be helpful to work with a trusty financial planner. They can guide you through the loan process and work with your mortgage broker, to come up with a thoughtful strategy to tackle your debt, build an emergency fund, and save for your future.
If you are thinking about taking out a mortgage or refinancing your home, connect with our team of advisors to get started crafting a financial plan.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists in Charlotte, NC. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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