Grab your favorite cup of coffee, open your notepad, iPad, MacBook, or whatever you prefer to take notes with—this post is packed with everything you need to know about physician loans. We’ll walk you through the process step-by-step, from researching and comparing banks to negotiating the best mortgage rates. Let’s dive in!
1. The Origins of Physician Loans: A Brief History
Physician mortgage loans may seem like a recent innovation, but they’ve been around for a while. Compared to the modern mortgage market, which became popular in the 1930s through insurance companies, physician loans are relatively new and still not as mainstream as conventional mortgages.
It all started in the mid-2000s when a forward-thinking employee at Bank of America (let’s call him Steve) noticed an opportunity. Each year, over 16,000 new medical school graduates with dreams of becoming practicing physicians were being matched with residency and fellowship programs across the U.S. These graduates, burdened with massive student loans (an average of over $205,000 in 2023), were struggling to qualify for traditional mortgages.
Steve recognized that while these new doctors had substantial debt, they also had one of the lowest default rates (.02%) of any demographic and excellent future earning potential. By creating a special loan product tailored to physicians, Steve realized the bank could attract these high-earning clients early in their careers.
After pitching the idea to the bank’s leadership, the physician loan program was born. It filled a crucial gap in the market, allowing the bank to generate significant revenue by helping doctors secure mortgages despite their student debt. Other banks soon followed suit, and the physician loan program became a valuable tool for attracting and retaining physician clients.
Now that you know the history, let’s explore what physician loans look like today.
2. What is a Physician Loan?
Physician loans are specially designed mortgage products that cater to the unique financial situations of doctors, residents, and fellows. Here’s what sets them apart:
- Low or No Down Payment: Physician loans typically require little to no money down, often offering 100% financing.
- No Private Mortgage Insurance (PMI): Unlike conventional loans, physician loans don’t require PMI, even with a low down payment. This saves you money and avoids unnecessary expenses.
- Exclusion of Student Loans from Debt-to-Income Ratio: Physician loans often don’t count student loans in your debt-to-income ratio, making it easier for recent graduates to qualify.
- Income Based on Future Earnings: These loans accept your residency, fellowship, or employment contract as proof of future income, rather than relying on past earnings.
- Bank Account Requirement: Some banks may require you to open an account with them as a condition for the loan, ensuring a broader relationship beyond just the mortgage.
- Eligibility for Residents, Fellows, and Practicing Physicians: Most banks offer these loans to medical professionals at various stages of their careers.
- Property Type Restrictions: While physician loans can be used for single-family homes and townhomes, they may have restrictions on purchasing condos, depending on the region and or lender.
- Jumbo Loan Options: Physician loans may also cover higher loan amounts, though not all banks offer jumbo loans, and those that do may charge higher rates for these riskier products.
- Gifted Funds for Down Payment: In some cases, physician loans allow the use of gift money for down payments, reserves, or closing costs.
- Credit Score Requirements: Typically, you’ll need a credit score of 700-720+ to qualify, with the best rates available for those with scores over 760.
- Loan Payment to Income Ratio: Your monthly mortgage payment typically can’t exceed 38-43% of your income, ensuring that the loan remains affordable.
Now that we’ve covered physician loans, let’s compare them with conventional conforming loans.
3. Conventional Conforming Loans
Conventional loans are the standard mortgage option for most homebuyers, but they come with different requirements:
- Down Payment: Conventional loans typically require a 3% to 5% down payment. For example, a 3% down payment on a $400,000 loan would be $12,000.
- Private Mortgage Insurance (PMI): If you don’t have at least 20% down, PMI is required to protect the lender in case of default. This can be expensive.
- Credit Score: You can qualify with a credit score as low as 620, though lower scores may lead to much higher interest rates.
- Cash Reserves: Conventional loans require two to three months of cash reserves to cover PITI (principal, interest, taxes, and insurance) payments.
- Proof of Earnings History: You’ll need to provide documentation like W-2 forms, bank statements, and pay stubs. Self-employed borrowers must submit two years of tax returns.
- Debt-to-Income Ratio: Your debt-to-income ratio can range from 38% to 50%, depending on the lender.
- Condominium Eligibility: Conventional loans are generally more flexible, allowing you to purchase condos in most markets.
4. Physician Loans Are Available Nationwide
You can secure a physician loan in every U.S. state, including Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, and many more. However, not all banks offer these loans in every state, and loan amounts, rates, and terms may vary by city.
Two national banks, Bank of America and Capital One, offer physician loans across all 50 states, making them reliable options for doctors looking to purchase a home anywhere in the country.
5. Complete List of Banks That Offer Physician Loans:
Here’s a list of banks that offer physician loans:
- American National Bank Trust
- Atlantic Coast Bank
- BancorpSouth Bank
- Bank of America
- Bank of Nashville
- Bank of Texas
- BankSNB
- BMO Bank
- Cadence Bank
- Capital One
- Citizens Bank
- Cohutta Bank
- Fifth Third Bank
- First Citizens Bank
- First Horizon Bank
- First National Bank of Pennsylvania
- First United Bank
- Franden Bank & Trust
- Fulton Mortgage Company
- Huntington Bank
- Lake Michigan Credit Union
- Liberty Federal Credit Union
- Mercantile Bank
- PNC Bank
- Regions Bank
- South State Bank
- SoFi
- Susser Bank
- TD Bank
- The Federal Savings Bank
- Truist
- UMB Bank
- Washington Trust
- Winstrust Mortgage
Instead of contacting all these banks individually, let Doctor Loan USA take the heavy lifting off your plate by connecting you with a loan officer who specializes in physician mortgage loans.
6. Mortgage Program Options
There are several mortgage options available, including:
- Conventional Mortgages: These are standard loans that aren’t part of government programs. They come in various forms, including 30, 20, 15, and 10-year fixed rates or 5/1, 7/1, and 10/1 ARMs (adjustable-rate mortgages). A 20% down payment gets you the best rates and avoids PMI, but options exist for lower down payments, though they come with higher rates and PMI requirements.
- FHA Loans: Backed by the Federal Housing Authority, these loans allow for lower credit scores and require a minimum 3.5% down payment, but PMI is mandatory.
- VA Loans: Available to U.S. military veterans, these loans require no down payment or PMI but include an upfront fee (1.5% – 2%) depending on the down payment.
- USDA Loans: Designed for rural, low-income borrowers, USDA loans require no down payment and are often cheaper than FHA loans but do require PMI.
State and Local Programs: These programs assist low to moderate-income buyers and may be targeted at specific professions like teachers, firefighters, and police officers.
7. How to Compare Banks and Their Mortgages
Navigating the world of mortgages can be overwhelming, but taking the time to research and compare your options is crucial to finding the right fit for your needs. While it might seem tempting to focus solely on finding the lowest interest rate, it’s important to remember that the best deal isn’t always the one with the lowest number. The right lender for you will offer not just competitive rates, but also terms and services that align with your unique financial situation and long-term goals.
Here’s how we can help you find the lender that’s truly the best fit for you:
- Start with Research: We’ll guide you through researching banks and lenders online. Start by identifying those that offer physician loans and have a strong reputation for working with doctors. We’ll help you sift through the information to create a shortlist of lenders that match your needs.
- Connect with Specialists: Once you have a list of potential lenders, we’ll connect you with loan officers who specialize in physician loans. It’s crucial to work with someone who understands the unique challenges and opportunities doctors face, rather than relying on a general hotline or inexperienced loan officer.
- Get Personalized Loan Estimates: We’ll assist you in requesting Loan Estimates from multiple lenders. These estimates will give you a clear picture of the rates, closing costs, and terms each lender offers. But remember, it’s not just about the lowest rate—other factors like loan flexibility, customer service, and the lender’s ability to understand your specific needs are just as important.
- Evaluate Your Options with Expert Guidance: We’ll help you compare these Loan Estimates, looking beyond the numbers to consider the overall value each lender offers. Sometimes a slightly higher rate might come with benefits that are more suited to your situation, such as better customer support, fewer fees, or more favorable loan terms.
- Make an Informed Decision: Armed with the right information and support, you can confidently choose the lender that offers the best overall package for your needs—not just the lowest rate. We’re here to ensure that you’re making a decision that benefits you in the long term, not just in the moment.
Remember, finding the right lender is about more than just numbers on a page. It’s about finding a partner who understands your needs as a physician and is committed to helping you achieve your financial and homeownership goals. Let us help you navigate this process, so you can make the best possible decision for your future.
8. How Mortgage Rates are Determined by Banks
Mortgage rates are influenced by a variety of factors, making it important to understand what drives these rates when you’re shopping for a home loan. While it might seem like rates are tied to a single economic indicator, the reality is more complex. Banks aim to remain competitive while also ensuring profitability, which involves a strategic approach to setting loan terms and rates.
Key factors that influence mortgage rates include:
- The Secondary Mortgage Market: Banks often bundle home loans into mortgage-backed securities, which are then sold to investors. The prices that investors are willing to pay for these securities can impact the rates banks offer to new borrowers.
- Inflation Rates: Higher inflation typically leads to higher mortgage rates, as lenders need to maintain their profit margins in a market where the value of money is decreasing.
- The Price of U.S. Treasuries: Mortgage rates often move in tandem with U.S. Treasury yields, particularly the 10-year Treasury bond. When Treasury yields rise, mortgage rates tend to follow.
- Federal Reserve Funds Rate: While not directly tied to mortgage rates, the Federal Reserve’s decisions on interest rates can influence broader financial markets, including the cost of borrowing for banks, which in turn affects mortgage rates.
Understanding these factors gives you valuable context when evaluating mortgage offers and negotiating with lenders. It’s a strategic game where many elements come into play, and being informed can help you secure the best possible terms for your home loan.
9. Researching Mortgage Rates
To get an idea of current mortgage rates, use websites like Zillow, NerdWallet, Mortgage Daily News, and Bankrate.com. These sites provide a general overview of rates, though they may not include all costs. Be prepared for follow-up contacts from loan officers if you submit a request for more information.
10. Negotiating Mortgage Rates in Today’s Market
Negotiating mortgage rates has become increasingly challenging due to the complex web of government rules and regulations that lenders must navigate. These regulations are designed to protect consumers and ensure fair lending practices, but they also mean that there’s less flexibility for lenders to adjust rates on a case-by-case basis.
In the past, borrowers might have been able to negotiate a lower rate with some persistence and savvy, but today, most loan officers are operating within strict guidelines. Additionally, it’s important to understand that most loan officers are not compensated based on the interest rate you receive. This means they have no incentive to withhold a better rate from you—in fact, they are motivated to offer you the best rate they can, given the constraints they’re working under.
While it may be more difficult to negotiate rates directly, you can still ensure you’re getting a competitive deal by comparing offers from multiple lenders and understanding the full scope of fees and terms involved. We can help guide you through this process, ensuring that you’re armed with the knowledge and support you need to make the best decision in today’s more regulated market.
11. Finding the Perfect Home
Once you’ve secured your mortgage, it’s time to find the perfect home. Start by defining your criteria using guides from HGTV, Forbes, and Houzz. Online tools like Zillow, Trulia, and Redfin are great for virtual house hunting.
When you’re ready, find a Realtor who specializes in working with doctors. There are many real estate professionals across the country who understand the unique needs of physicians and can help you navigate the market. Most very good loan officers have a network of good agents whom they can recommend.
12. When Renting Makes More Sense
Buying a home isn’t the best option for everyone. If you’re unsure where you’ll be in a few years or if you’re in a declining market, renting might be the better choice. Consider factors like market stability and your financial situation before making a decision.
If you’re carrying significant debt, you might want to focus on paying it down before buying a home, even with a physician mortgage loan.
13. Million-Dollar Homes and Residency
While it’s tempting to dream big, most residents won’t qualify for million-dollar homes. With an average resident salary of around $67,500, banks will limit how much you can borrow based on your income.
However, if you have substantial savings before starting residency, or a partner who also has income, you may have more options. Otherwise, focus on finding a home that fits your budget and financial goals.
14. Educate Yourself
Buying a home is one of the most significant purchases you’ll make, so it’s essential to educate yourself about the process. Our physician mortgage loan FAQ can answer many of your questions, but it’s crucial to continue learning about finance and home buying. The more you know, the better prepared you’ll be for your first home purchase and any future real estate investments.
Thanks for sticking with us through this comprehensive guide. We hope it helps you secure the best mortgage at the lowest rates for your new home.
