Recently graduated medical students make for interesting borrowers. They have the unique quality of being deep in debt, but with a high probability of making boatloads of cash later on.
While they are in that transitional period right after they graduate medical school, and are making modest salaries as residents, they have too high of a debt-to-income ratio, and won’t qualify for most conventional loans.
Someone over at Bank of America made the initial mental leap that these future high-earners were an untapped market, and invented the doctor loan.
What is it?
With a doctor loan, the lender understands that you will have much more money in the future than you do right now, so the requirements aren’t quite as strict as they usually are for a low income borrower. For this reason, they often don’t factor in student-debt to the debt-to-income ratio.
There is also a low down payment minimum (10 percent or less), and since they know doctors have a very low chance of defaulting, there is no private mortgage insurance required.
It’s also fairly common for lenders to only require an employment contract as proof of income in order to accommodate doctors who have to relocate before they start their first job. Typically, the borrower has the option of a 30-year fixed rate, or a five- or seven-year adjustable rate loan.
What’s the catch?
Shocker—I know—but lenders aren’t doing these doctors a favor out of the kindness of their own hearts. The ulterior motive is to build relationships with future wealthy doctors, and get them to do more than just a mortgage.
In most situations, the applicant will have to have at least a checking account with the bank in order to obtain the doctor loan. After that, the bank is hoping for credit cards, investment banking, and anything else that might tickle the doctor’s financial fancy.
On top of that, most of these loans come with higher interest rates, and fees/points than conventional loans.
The bottom line:
While the doctor loan does have its advantages, in most situations the cons outweigh the pros. One strong reason against them is that the majority of residents will relocate after their residency is over in 1-5 years, which is almost never enough to break even on a home.
If you wait a little longer until you have an actual income, and a better debt-to-income ratio, you can get a much better deal with a conventional loan.