This post is the fourth part in the series on mortgages and my experiences:
- The Basics of Home Mortgages and How Not to Get Scammed
- Dealing with Online Lenders
- The fundamentals of mortgage loans
My local mortgage lender reintroduced me to the notion of getting a doctor loan. I had heard about these options from financially savvy doctors back in residency, but I never really learned whether these loans were actually prudent options. In general, the perks are as follows:
- Option to put down less than 20% of the purchase price of your home without having to buy private mortgage insurance. I would estimate that this would save you about $1,000 – $3,000 a year.
- Ability to borrow up to 95% of the purchase price of your home. This means that you’d only have to put down $50,000 for a $1 million home!
- Approval of loan with only proof of an employment contract.
- Better rates than traditional loans if you are going for a jumbo mortgage
Depending on your lender, there may still be other options. All of the lenders who I spoke to stated that borrowers would still need to have a good credit score above 700.
When should I consider a Doctor Loan?
In the most extreme case, no financially cognizant person should obtain a doctor loan with the intention of overextending your earning power. For example, if you are a neurosurgeon starting your first job that brings in $1.4 million of income annually, you could reasonably get a doctor loan on a $1 million house with a $50,000 downpayment. Assuming that you can hold your job for the next few years, you should be in decent financial shape.
In contrast, everything else belong is a questionable situation. The average white-collar professional whose salary is in the $50,000 range may actually own a house that’s five times his annual salary ($250,000). Similarly a doctor who earns $250,000 annually might be able to “afford” a $1.25 million home. Through a doctor loan, you might be able to buy this home without having to cough up $250,000 for a traditional mortgage downpayment.
Will the lender underwrite such a loan for you? Probably. Most likely. Prior to the housing crisis, doctors could get approved for loans easily with very little oversight. It’s a little bit more difficult now, but is still easier than what the average consumer will experience simply because you as a doctor, you should have a stable job.
Should you use the doctor loan in this scenario? Probably not.
Ultimately it depends on what lifestyle you need to live at the moment and how you would fare otherwise.
You know that you’ll definitely be living in the same place for the next five years.
If you are a high income physician who knows that you’ll definitely stay at your job for at least the next five years, you can entertain the ideal of buying a house. Let’s say that you really don’t have enough in your savings account just yet to make the standard 20% downpayment…perhaps the doctor loan is for you. I knew an orthopedic surgeon who used a doctor loan on a house that was priced significantly below market value. At the time, he was planning to stay in the area for at least the next few years, but putting down 20% would have been a stretch for his purchase. (He found another job two years later in another state).
You’re an investing superstar.
Not having to plop down a significant chunk of your savings on a house allows you to invest the difference to your liking, whether in the stock market, real estate investments, gambling, bonds, P2P lending, or under your mattress. Most mortgage rates run in the 4.5% or less range, so there is some merit in hedging your investing luck/skill elsewhere.
Should you do it? I’d have to argue that most doctors should not get a doctor loan for this reason alone—there are more financially naive doctors than business shark doctors. It’s probably unwise to think that you are an anomaly.
What are some other reasons why doctors should get a doctor loan?
(Photo courtesy of TaxRebate.org.uk)