Why a Physician Mortgage is a Better Choice Than an FHA Loan
When it comes to purchasing a home, physicians have unique financial needs and opportunities. They often face high student loan debts but also enjoy high earning potential. This presents challenges, but it also means they can take advantage of mortgage products designed specifically for their circumstances, like the physician mortgage. One such product that frequently comes up in discussions is the FHA loan, but there are key reasons why a physician mortgage might be a much better choice.
Physician Mortgages vs. FHA Loans: The Key Differences
- No PMI (Private Mortgage Insurance) vs. FHA’s Upfront Mortgage Insurance Premium (UFMIP) AND PMI MONTHLY!
One of the most significant drawbacks of an FHA loan is the mandatory upfront mortgage insurance premium (UFMIP) that comes with it. Currently, this fee is 1.75% of the loan amount, which means that if you’re taking out a $500,000 loan, you’d have to pay an additional $8,750 at closing. This fee is essentially like an “upfront tax” that adds to the cost of your loan. Furthermore, you’ll also be required to pay an annual mortgage insurance premium (MIP) for the life of the loan if your down payment is less than 10%.
On the other hand, a physician mortgage typically does not require PMI or UFMIP. This is a huge advantage because PMI can add a significant amount to your monthly mortgage payment, and the upfront insurance costs can be a financial burden, especially when you’re trying to save for other expenses like renovations or paying down student loans.
- No Minimum Down Payment vs. FHA’s 3.5% Minimum Down Payment
Another major advantage of physician mortgages is that many lenders offer 100% financing, meaning you could purchase a home with no down payment required. In contrast, an FHA loan requires a minimum down payment of 3.5%. While this might seem like a low amount, it still adds to your initial costs, and the money you put down could be better spent elsewhere, such as investing in retirement funds or paying down debt.
- Flexible Income Considerations
FHA loans have strict requirements regarding your debt-to-income (DTI) ratio, and they may not be as flexible when it comes to evaluating income stability. Physicians, however, often have variable income based on bonuses, locum tenens work, or other compensation structures, which may be harder to qualify for with an FHA loan. Physician mortgages are designed to accommodate this variability, recognizing the potential for high, growing, and stable income, even if your exact income fluctuates year-to-year.
- More Lenient Credit Score Requirements
FHA loans typically have more lenient credit score requirements than conventional loans, but they still come with a minimum credit score threshold that you’ll need to meet. Physician mortgages, however, are often even more forgiving when it comes to credit score, particularly if you are a young physician just starting your career. As a result, if you have a less-than-perfect credit score, you may find a physician mortgage to be the more accommodating option.
The Financial Toll of FHA’s 1.75% Funding Fee
The FHA’s 1.75% funding fee is effectively like a tax on your home purchase. Not only does this increase the upfront cost of your loan, but it also makes the mortgage more expensive over time because it gets rolled into your loan balance and accrues interest. For a $500,000 loan, that’s an additional $8,750 upfront, and with interest, this fee can grow even larger over the life of your mortgage. For physicians, especially those just starting their careers, this extra expense could be put to better use, such as reducing student debt or growing wealth for the future.
The Bottom Line: Why Physicians Should Consider Physician Mortgages
Physician mortgages offer several advantages over FHA loans, including no PMI, no UFMIP, and the potential for 100% financing. The FHA’s 1.75% funding fee, in particular, is a significant cost that doesn’t exist with physician loans. Given the high cost of medical education, physicians should take advantage of mortgage options that are designed to help them build wealth, not add unnecessary fees to their financial burdens. Whether you’re a newly minted doctor or an established physician, a physician mortgage could be the smarter choice for purchasing your home.
In the end, a physician mortgage gives you the freedom to focus on your career and future without being weighed down by unnecessary fees or restrictive terms. Check out our article here on other physician mortgage myths.
https://www.drhomefinance.com/debunking-10-common-myths-about-physician-mortgages/
