[FPMD: I'm a big fan of taking advantage of programs specifically designed for physicians. The doctor mortgage is one of these perks. But there are caveats. The following guest post is provided by Josh Mettle of Fairway Physician Home Loans. Full disclosure: Fairway is a paying sponsor of FPMD.]
Without a doubt physicians entering residency or in training struggle the most with mortgage financing. Residents and fellows get declined for a mortgage at a much higher rate than other clients. Most underwriting guidelines – even physician loan programs – don’t fully acknowledge and address the unique set of challenges most residents and fellows are up against. Why do they struggle?
1. Too Much Debt
Let’s start with the incoming resident who is graduating med school and transitioning to training. Most incoming residents have student loans, the majority of which are in deferral and appear on their credit report with a big balance and a zero payment. Sound familiar? This is problematic due to mistakes from inexperienced loan officers. It’s alarming how many residents are declined at the very last minute because the loan officer pre-qualifies them using a zero payment for student loans, only later to have underwriting decline the loan when they calculate a payment for those deferred loans. To ensure this doesn’t happen to you, make sure you are working with a loan officer who specializes in physician home loans and has testimonials from past resident physician clients they can share with you.
2. "No Man's Land"
I call the 6-month grace period between graduating med school and the end of student loan deferral “No Man’s Land” because the student loan servicers typically will not give you anything confirming your future income driven repayment amount during that time. Without that documentation from the student loan servicer, most underwriting guidelines (including most physician home loan guidelines) require you to qualify at a payment amount based on 1-2% of the outstanding balance.
- That means if you have $250k in student loans, underwriting will count a payment against you between $2.5-5k per month. This is typically too high of a debt-to-income ratio to qualify for any mortgage.
3. A Responsible Lending Environment
Even physicians in training with a credit report showing an income driven repayment for student loans can struggle, since many banks and their underwriters have become ultra conservative since the Dodd Frank Act was put into effect in 2015. Within the Dodd Frank Act is a provision called the “Ability To Repay Rule”, which essentially requires the mortgage company to prove a borrower's ability to repay a mortgage loan. If the mortgage bank is found to have made an error in determining the borrower’s ability to repay, they are required to refund up to 10 years of payments to the borrower. This kind of punitive legislation has made mortgage underwriters less likely to lend to borrowers with high student loan balances.
4. Lack of a Paper Trail
Student loans are where the challenges for residents and fellows begin, but not where they end. We also work with many relocating clients who want to close on the purchase of their new home prior to their first day on the job. This can be particularly challenging if the program you will be working for does not provide you with a final fully signed employment contract until you show up for orientation. Most clients want to be in their home and settled by then. Very few mortgage programs - even most of the physician mortgage programs in existence - will allow you to close without a final signed employment contract or your first paystub in hand.
5. You Make Too Little.
Having a down payment is another hurdle. Most likely while in training you have had limited income and major expenses to deal with. Saving for a down payment is not always an option. Most mortgage underwriters require that your down payment be seasoned in your account for a full 60 days before you write an offer on your home. This is how the underwriter documents that the money is actually your money and it is not associated with a new loan that has not reported to credit yet.
Because the mortgage process for residents and fellows can be a struggle it is important you work with someone who understands the complexities of your situation has the experience to skillfully guide you to a successful home loan.
Josh Mettle is an industry leading author and mortgage lender, specializing in financing physicians, dentists, CRNA, and physician assistants. You can get more great physician real estate and mortgage advice here or his by visiting his book site. Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages. Josh is dedicated to helping physicians become more financially aware and able; listen to “Physician Financial Success” podcast episodes or download Josh’s latest tips and advice here.
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