Doctor Loan

A few years ago, Bank of America realized that there was an untapped potential market out there for mortgage business. Every year 16,000 new doctors graduate from medical school and about the same number graduate from residency. These people have little money, are financially naive, have vast sums of future earnings potential, and, best of all, almost all of them will soon purchase a mortgage. Yet, by standard criteria, they will have a difficult time securing a mortgage. They don’t have anything to put down, they have a ton of debt already, and they have no proven earnings. They usually haven’t even started their job yet when they buy a home in a new city.

So the powers that be at the bank figured, “Why not create a program that allows these high future-earners to buy a mortgage from the bank? The chances of them defaulting are very low (0.2%-much lower than a standard borrower) and they’ll soon need someplace to do their banking and investing too.” They figured they could use a little higher interest rate and fees, since docs aren’t all that financially sophisticated and since they don’t have many other options anyway. “Plus, if these new clients are like most doctors, they’ll go on recommending us to all their colleagues in the future.” Thus, we see the creation of “the doctor mortgage loan.” Since that time, many other banks have followed suit.

A doctor’s loan usually has all or most of these features:

• May be limited to a new resident, new attending (7-10 years out of residency or less), or dentist only (although some offer loans to veterinarians, optometrists, podiatrists, and even attorneys and many lenders will lend to a doctor at any stage of his career, or even for a second home.)
• Requires little money down (0-10%)
• Doesn’t require the borrower to purchase mortgage insurance (PMI)
• Will accept a contract as evidence of future earnings (instead of paystubs the doctor doesn’t yet have)
• May require the physician to open a bank account at the bank from which the mortgage is paid by auto-draft
• Is occasionally restricted from certain types of homes, such as condos, but in general can be used for any home
• Has the same rate whether loan amount is above or below “jumbo loan” limit ($417,000 in my area)
• Some programs even allow you to use gift money for a down payment, for required reserves, or for closing costs
• Requires cash reserves equivalent to a few months of Principle, Interest, Taxes, and Insurance (PITI), a reasonably good credit score, and a loan payment to income ratio of less than 38% (as high as 50% with some lenders)
• Often doesn’t calculate student loans toward the loan to income ratio or uses a modified payments similar to the Income Based Repayment/Pay As You Earn calculation