Doctor’s vs. Conventional Mortgage

This post is an expansion from a discussion with an attending reader who’s considering doctor’s mortgage.

Since within the last year I have purchased my first home with a doctor’s mortgage, and then refinanced it to a conventional mortgage. I would like to share a few things I learned about them.

Some people like the doctor’s loan because it’s believed to be

“No down payment, No PMI, No paystubs/W2 (just contract)”

but there’s more to the story.

• doctor’s mortgage interest rate is generally 1% higher than conventional loans (this may more than offset the NO PMI sweet deal doctor’s mortgage has.) PMI for most conventional loan falls off automatically when your loan to value ratio (LTV) reaches 80% (this is not hard to accomplish as you put equity away monthly PLUS your house naturally appreciates some if you got a decent deal with the initial purchase.)
• PMI only exists the first few years and for some less than one year of the life of the mortgage. However, doctor’s loan with a 1 whole point higher interest will be there for the entire life of the loan. So definitely crunch your numbers; not to be fooled with the NO PMI bait of doctor’s loans.

• Almost all major doctor’s mortgage companies still requires at least 5% down and that 5% has to be your OWN Money (ie not a gift, but money that has sat in your bank account for at least 2 months, because under-writing ask for at least 2 months of bank statements. or it has to be money that can be paper-trailed to the source: YOU.)
• Some small banks will literally take 0% down. But 0% down is pretty detrimental to your financial health as the amortization table looks quite ugly (ie. the proportion of principle to interest per each mortgage payment is very very low when it is 100% financing/ 0% down).
• Additionally, the more you put down, the lower your interest rate can get. This is true even with doctor’s mortgage. You can ask you lender to provide you with a table of amount of down payment corresponding with the respective interest rate you will get given the rest of your loan application stays the same (ie. same credit score,  same monthly debt liability, same income, same purchase price, etc.)
• When I was shopping for doctors loan, I got estimates from BBVA, BOA, and Utah Physicians Home Loans. BOA was the first to show me with a greater down payment, they could lower my interest rate.

• If i had to do it all over again, i would have chosen an ARM mortgage rather fixed rate. my friend went for a 3.625%, 0% down, 5/1 ARM doctor’s mortgage while I was stubborn and got a 11% down 4.375% 30 year fixed mortgage. in less than a year, i refi into a ARM @ 3.375% conventional mortgage by paying down my mortgage a few 1000’s (plus my home value went up 16k) to get 80% LTV and avoid the PMI.
• In 20/20 hindsight, i would have gone straight for ARM at purchase instead of refinancing into ARM. I would have gotten the lowest interest rate possible (ARM frequently is 0.5%-1% cheaper than fixed rate). When I refinance after 7 months of purchasing my home, I did the calculation and learned that I can easily pay off the entire house within 4 months (on my then conservatively estimated attending salary) of the first rate adjustment (even if it adjusts to the maximum life time rate  @8.375%.)
• Low interest rate is very important at the beginning of your mortgage life, as you have the largest mortgage principle debt early on. This is exactly reverse of how your retirement fund works: at the beginning of your retirement savings, the saving rate matters lots more than return/gain rate, because you have little principle nest egg. But when nearing retirement, the rate of return matters much more than the rate of saving as you are near the maximum nest egg before retirement.

• If you crunch the number, and are certain that you can pay off your mortgage shortly if/when the rate adjusts higher, I highly recommend going for ARM. You will get a nice low interest rate for the fixed rate portion of the mortgage, saving you lots in the early years of your mortgage, allowing you to build equity much faster on a often time smaller mortgage payment (free up cash flow).  Then, for most of us, our income at least 4x-6x when we finish training and become attending, which fits nicely into a 5/1 ARM or 7/1 ARM time frame.
• For instance, when I refinance my doctor’s loan, my mortgage went from 1088/mo to 925/mo, while the smaller payment actually contributes to a faster rate of equity building, ie. my principle payment went from just 300/mo to nearly 350/mo.  So clearly the benefit of lower interest rate in the early years of the mortgage is manifold:

1. Lower mortgage payment, freeing greater cash flow
2. Lower interest rate, less money down the drain
3. Faster equity building with higher proportion of principle payment/mortgage payment
4. You can put the cash flow towards higher interest debt (student loan), higher return investment (like ROTH)

in short, I think conventional loan is a better deal than doctor’s loan.

the true advantage of doctor’s loan is that under-writing is MUCH LESS stringent than conventional loan, and therefore you can get approved with just a contract/start within 60 days, rather than actual pay stubs. this allows us to buy a house a little sooner than the conventional loan.  but if you ask me, it might be worth the wait… A few months of savings for some down payment and actual paystubs can save you quite a bit of interest over the life of the loan.

• did you take a doctor’s loan? was it worth it?
• did you have a conventional loan? how did it work out for you?
• did you get a ARM or fixed rate mortgage? how did it work up for you?

Comment below!