Physician loans, also referred to as doctor loans, present a unique set of circumstances for lenders because new doctors do not have any work history and usually have a significant amount of student loan debt. This situation will typically prevent physicians from getting approved on any conforming conventional products, so many banks have developed special portfolio products to originate and service these types of loans. Along with taking a risk to accommodate these borrowers, there also comes reward. Below are a few reasons why banks have developed physician loans:
1. Cross-Selling – Physicians will most likely turn into future “high-earning” borrowers who will soon need some place to do their banking and investing.
2. Low Default Rates – The default rates on these loans are substantially below normal levels.
3. Referrals – Physicians (including doctors, dentists and veterinarians) are a group of professionals who typically would recommend their bank to their colleagues.
These loans, since they are lender portfolio products, do not have the same characteristics or qualifying criteria . Many will have some or all of the following unique options:
1. Made only to their target group (doctors, dentists and veterinarians).
2. Require very little down payment (0-5 percent).
3. Normally does not require private mortgage insurance (PMI), even if less than 20 percent down payment.
4. Often does not include student loan payments in DTI (or a lesser payment).
5. Will accept a contract as evidence of future earnings—in lieu of paystubs or W-2s, which don’t yet exist.
6. Interest rate will be slightly higher than conventional rates, but there normally would be no difference in rates even if loan amount is a jumbo size (>$417,000).
Many banks covet these loans for the borrower’s high earning capability and the potential to cross-sell additional bank products. These loans are rarely in default and promote goodwill among a profession that banks find extremely profitable to do business with.
So if the Doctor Loan Program sounds “Too good to be true”… it’s not.
These banks want Physicians as long term customers.