What Is Prepaid Interest? Here’s Why You Need to Pay the Mortgage Lender Ahead of Time

As the name implies, “prepaid interest” is money you owe to a bank or mortgage lender that is paid in advance of when it is actually due.

In terms of why it needs to be paid before the due date, there are several reasons, though it mostly boils down to the fact that mortgages are paid in arrears.

This means mortgage payments are due after the month ends, because interest must accrue (over time) before it can be paid.

This differs from rent, which is paid in advance of the month in which you occupy a rental unit.

If buying a home or refinancing an existing mortgage, prepaid interest will often be listed as a line item along with your other closing costs. Let’s learn why.

Prepaid Interest on a Home Purchase

Mortgages are generally due on the first of the month, though there is also typically a grace period to pay until the 15th.

Additionally, mortgage lenders don’t accept partial payments, so an entire month’s payment must be paid each month.

When you purchase a home, there’s a good chance you’ll close on a random day of the month, say the 10th or the 15th, or the 24th.

This means your mortgage will accrue interest for an odd number of days during that initial month.

Instead of asking you to pay that odd amount of interest as your first mortgage payment, you simply take care of it at closing.

By take care of it, I mean pay it in advance at a daily rate so you start with a clean slate once the loan funds.

Using one of our closing dates above, those who close on the 10th would owe 20-21 days of “per diem interest” at closing. Per diem simply means per day. It is also known as interim interest.

This ensures the lender is paid interest for the time you hold the loan and reside in the property, despite a full mortgage payment not being due yet.

However, as a result of that prepaid interest, your first mortgage payment is pushed out a month.

Remember, a full month of interest must accrue before a payment is generated.

So if your home loan closed on January 10th, you’d pay 21 days of prepaid interest at closing, but the first mortgage payment wouldn’t be due until Match 1st.

Why? Because you already paid the interest that would normally be included in your February 1st payment at closing.

And now you must wait until interest accrues throughout the month of February to pay that amount in March, along with a portion of the principal balance (the loan amount).

This is often referred to as “skipping a mortgage payment,” though it’s not really skipping, it’s deferring and paying the interest portion only.

Prepaid Interest on a Mortgage Refinance

prepaid interest

If you already own a property with a mortgage attached, interest accrues daily throughout the month.

Assuming you decide to refinance that loan by taking out a replacement loan, interest will be due on both the old loan and the new loan at closing.

Similar to a home purchase loan, the interest will be calculated by taking the mortgage interest rate and how many days each lender holds your loan.

This will be broken up between old lender and new lender, with interest before your closing date going to your old lender, and prepaid interest from closing date to month-end going to your new lender.

So if you close on January 20th, you’d pay 20 days of interest to your old lender and 11 days of interest to your new lender.

This way the full month’s interest is squared away when you close, and you can start fresh with no interest due.

Then after a month’s time, enough interest will have accrued to make a full payment, which will be due on March 1st.

For the record, the payment due on January 1st would cover interest for the month of December.

In terms of how that interest is paid, you’d owe daily interest to the old lender based on the current principal balance and mortgage rate.

For example, if your loan payoff was $250,000 and your mortgage rate 3.5%, daily interest would be roughly $24. That’s about $480 for 20 days.

On the new loan, you’d owe 11 days of interest based on the new loan amount and interest rate.

If we’re talking a rate and term refinance with a 3% interest rate, it’d be $20.55 a day for 11 days, or $226.

Together, you’d owe about $706 to both lenders for the month of January.

As you can see, interest is paid to both the old lender and the new lender at closing when it’s a mortgage refinance.

How to Calculate Prepaid Interest

While you shouldn’t have to calculate prepaid interest on your own, thanks to the escrow officer assigned to your loan, it’s good to know how it works.

You can also check their math and better understand how mortgage lending works.

Veterans may qualify for a $0 down VA loan

Let’s look at an example of prepaid Interest.

Loan amount: $200,000
Mortgage rate: 3%
Daily interest: $16.44

First, you take the mortgage rate and divide it by 365 (days) to determine the per diem interest amount.

For example, if the mortgage rate is 3%, it’d be .03%/365, or 0.00008219.

Next, you multiple that by the loan amount (we’ll pretend it’s $200,000) to get $16.44. I rounded it up from $16.438.

Finally, you multiple that amount by the days in which you’re required to pay per diem interest, which will be the total amount of prepaid interest due.

So if you need to pay it for 12 days, it’d be $197.28, and that would be included with your other closing costs, such as your loan origination fee, home appraisal, etc.

Tip: Prepaid interest isn’t a junk fee or an unnecessary add-on. It’s mostly unavoidable unless you close on the very last day of the month.

When Is the Best Time to Close Escrow?

  • Most home buyers choose to close at the end of the month
  • This can help keep closing costs down (including prepaid interest)
  • May also align better with your old rental lease if it renews on the first of the month
  • But if you close early in the month your first payment won’t be due for a long time

Ultimately, you don’t always get to pick when you close, whether it’s a home purchase or a refinance, but there are some considerations here.

If it’s a home purchase, closing late in the month means less prepaid interest will be due. And possibly less wasted rent will be paid out to your landlord.

For example, if you close on the 30th of the month and per diem interest is $50, you’d pay maybe $100.

And you wouldn’t have to pay another month’s rent assuming your lease renews on the first of the month.

Conversely, if you close on the 8th of the month you may owe roughly $1,150 in per diem interest at closing. This means higher closing costs, which could jeopardize your loan approval.

The caveat is your first mortgage payment wouldn’t be due for about seven weeks, versus four weeks for the mortgage that closes on the 30th.

So you get extra time until that first payment is due, which can be nice. And it’s also possible to receive a lender credit that covers the prepaid interest anyway.

Many transactions are structured as no cost loans these days, meaning the lender covers closing costs via these credits and they aren’t paid out-of-pocket directly.

The home sellers may also provide seller concessions to cover these costs.

The flipside is that the interest you pay doesn’t actually go toward paying down your loan amount and is basically just extra interest.

If you close near month’s end, beware that lenders are often extremely busy so there could be delays or mistakes.

If you close very early in the month, such as on the 4th, your lender may provide a “credit” for those days of interest and make your first mortgage payment due less than 30 days later.

The downside is your first payment is due the following month, but the upside is you don’t pay any unnecessary interest.

Best Day to Close a Refinance

  • Generally favorable to close late in the month to avoid higher closing costs
  • But the very last week of the month can be extremely busy and cutting it close
  • Also consider the rescission period that tacks on 3 days to your closing date
  • Signing loan docs on a Wednesday or Thursday could help you avoid extra interest charges

When it comes to a refinance, the same logic basically holds, though you’re paying interest to the old lender and the new lender.

Those who are refinancing to a significantly lower interest rate will want to get it done ASAP to avoid paying the higher per diem rate of interest.

You could argue avoiding the end of the month due to how busy lenders are, and maybe shoot for the third week of the month to keep interim interest at bay.

That would still give you five weeks or so until the first payment is due on the new refinance loan.

And as noted, a lender credit could absorb the interest paid to the old lender and new.

If you time it absolutely perfectly, it might be possible to skip two payments if you close early in the month, though this isn’t for the faint of heart.

Also consider the right of rescission, if applicable, which pushes your loan closing out at least three days.

If you sign docs on a Monday, the lender won’t be able to fund until Friday, and there’s a decent chance you pay “double interest” through the weekend if the old loan isn’t paid off immediately.

To avoid this, even though it’s not a major cost, you’d ideally want to sign on say a Wednesday or Thursday, then fund on a Monday or Tuesday.

Simply put, the earlier in the month you close, the longer it will be until the first payment is due on the new loan.

Tip: If you pay discount points at closing, these are also considered prepaid interest because you’re paying money upfront for a lower mortgage rate during your loan term.

(photo: Abhi)

Source: thetruthaboutmortgage.com

FHA vs. Conventional Loan: These Charts Can Help You Determine Which Is Cheaper

It’s time for another edition of mortgage match-ups: “FHA vs. conventional loan.” Our latest bout pits FHA loans against conventional loans, both of which are extremely popular loan options for home buyers these days. In short, conventional loans are non-government mortgages, typically backed by Fannie Mae or Freddie Mac. Whereas FHA loans are government-backed mortgages… Read More »FHA vs. Conventional Loan: These Charts Can Help You Determine Which Is Cheaper

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Source: thetruthaboutmortgage.com

FHA-to-Conventional Refinance: How to Drop Mortgage Insurance Once and For All

While refinance applications seem to be slowing, there are still some good reasons to refinance your mortgage, even if interest rates aren’t currently at their best. First off, let me preface this with the fact that mortgage rates are spectacular. Yes, the 30-year fixed used to be in the mid-2% range, but a rate of… Read More »FHA-to-Conventional Refinance: How to Drop Mortgage Insurance Once and For All

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Source: thetruthaboutmortgage.com

Mortgage Rates vs. Omicron

Last week, the World Health Organization (WHO) designated Omicron, formally known as B.1.1.529, a variant of concern. This news rocked financial markets nationwide amid concerns of another series of lockdowns, travel restrictions, and so on. In short, there’s renewed fear that we’re not out of the woods on COVID, as some seemed to think prior… Read More »Mortgage Rates vs. Omicron

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Source: thetruthaboutmortgage.com

2022 Home Selling Tips to Get Top Dollar: Don’t Take the Red Hot Real Estate Market for Granted

While the recent stock market boom, coupled with near-record low mortgage rates will undoubtedly make prospective home buyers feel richer, lofty asking prices may have the complete opposite effect. Regardless of what happens to the economy this year, chances are that those who are planning to buy a home will, assuming they can find one… Read More »2022 Home Selling Tips to Get Top Dollar: Don’t Take the Red Hot Real Estate Market for Granted

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Source: thetruthaboutmortgage.com

Mortgage Rates vs. Home Prices: Is There Really an Inverse Relationship Between Them?

Mortgage Q&A: “Mortgage rates vs. home prices.” Today, we’ll take a look at the impact of both home prices and mortgage rates on your decision to buy a piece of property, along with the relationship they share. Obviously, both are very important not only in terms of whether you should buy (from an investment standpoint),… Read More »Mortgage Rates vs. Home Prices: Is There Really an Inverse Relationship Between Them?

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Source: thetruthaboutmortgage.com

Does Having A Mortgage Help Your Credit Score? Your Mileage May Vary, Here’s Why

Mortgage Q&A: “Does Having A Mortgage Help Your Credit Score?”

If you’ve ever pulled your credit report and/or viewed your scores, you may have noticed that the lack of a mortgage could actually be holding you back from credit score perfection.

Even if you already have a seemingly great credit score, the credit report “notes” could imply that an installment account like a home loan would further improve your scores.

But before you run out and get a mortgage, it’s important to point out that the impact may not be substantial, and you certainly shouldn’t take out of a mortgage for the sake of your credit.

That would be plain silly.

You Can Raise Your Credit Scores By Improving Your Credit Mix

credit mix

So why would a mortgage help your credit anyway? You’re taking on all that new debt. What gives?

Well, aside from the giant pile of new debt, when you take out a mortgage you essentially tell prospective creditors that you’ve made a very serious financial and lifestyle commitment. Yep, you’re a grownup now.

And most mortgages have loan terms of 30 years, so you’re not going anywhere fast.

[30-year vs. 15-year mortgages]

With a mortgage, you automatically add stability to your credit profile, which is certainly a good thing.

On top of that, mortgages also tend to come in very high dollar-amounts, unlike credit cards or auto loans/leases.

Instead of getting a $10,000 credit line, you’re probably looking at a six-figure dollar amount, which suggests that you were creditworthy to begin with to obtain the home loan.

This means you have a steady job, some assets in the bank, good FICO scores, and so forth.

FICO, the creator of the FICO score, actually considers “credit mix” as part of their scoring algorithm, and it accounts for 10% of your overall score.

So if your credit history consists of credit cards only, your FICO score will suffer, or at least not prosper as it should.

Again, it may still be great or even “excellent” on paper, but without a mortgage behind it, you are perceived as one-dimensional.

Your Credit Report Is Your Résumé

Think of your credit report like a personal résumé. Yeah, I used the accents. Instead of employment history, it’s your credit history.

You want it to be good, right? You want to show possible creditors you’ve got some serious experience, not just an entry-level job.

Heck, anyone can manage a few credit cards over the years, but those who can handle a high-dollar mortgage display a lot more responsibility.

Why? Because the monthly payments are often much higher than any other line of credit. And homeownership alone is a signal of dependability.

If you can muster the payment each month for year after year, it shows you’ve graduated beyond managing a measly credit card or two.

As noted, the loan term of 30 years (in most cases) means you increase the length of your credit history over time.

And if you’re also paying down other debts and credit cards each month, you’re essentially a credit superstar.

For these reasons, a mortgage could actually improve your credit score, though there’s no hard and fast number.

How a Mortgage Can Hurt Your Credit Score

new mortgage FICO

Of course, the presence of such a large loan could actually lower your credit score initially if you factor in the credit inquiry and the new debt. And the fact that you haven’t yet shown the ability to manage it.

Simply put, you’re more of a credit risk than you were before because you now owe a bank thousands upon thousands of dollars, and may have overextended yourself to some degree.

If you combine this new line of credit with, perhaps, a new credit card or two (to buy furniture or appliances), your scores may suffer.

Additionally, if you miss a mortgage payment, expect it to be considerably worse than missing a credit card payment.

And potentially detrimental if you wish to get another mortgage or refinance your home loan in the future.

A while back, FICO did some research to determine how new mortgages affected consumers’ credit scores.

They identified about 2.8 million consumers with a newly-opened mortgage between May 2017 and July 2017.

Of those, 12% experienced a significant increase in their FICO score between April 2017 and April 2018, while 11% of consumers had a significant decrease.

They defined “significant” as a 40+ point change in score. For example, going from 700 to 740, or dropping from 700 to 660.

The remaining 77% of consumers “had a relatively stable score change,” defined as less than 40 points between the two time periods.

As to why there was so much divergence, it was due to overall credit behavior. Your mortgage doesn’t exist in a vacuum, and hence your mileage may vary.

In short, those who saw scores go up reduced credit card balances, paid down installment loans, and avoided late payments.

Conversely, those who saw their scores drop did the opposite. And it may have had nothing to do with the mortgage, at least directly.

FICO’s advice for those who open new mortgages is the same as it is for anyone else: pay bills on time, reduce outstanding balances, and apply for new credit only when necessary.

If you’re a first-time home buyer, be especially careful not to overextend yourself. Get used to the many new bills you’ll have to pay each month!

Those who saw their scores drop considerably after taking out a new mortgage probably bit off more than they could chew.

Mortgages Can Fortify Your Credit Scores Over Time

Now the good news. Over time, the presence of a mortgage should reinforce your credit scores and make you extremely attractive to new creditors.

If you make on-time mortgage payments each month, your scores will rise and you’ll also prove that you can manage the largest amounts of debt thrown your way.

This means you’ll have a much easier time obtaining subsequent mortgages in the future, or refinancing your existing home loan, at least with regard to your credit history.

And smaller loans, like auto loans and credit cards, will be easier to obtain because creditors will have documented evidence that you can handle the largest loans out there.

With a mortgage in the mix and paid as agreed, your FICO score should tick higher and higher as more on-time payments are made.

At the end of the day, a home loan isn’t going to completely make or break your credit score, but it can certainly give you a little extra push.

Conversely, if you happen to miss a mortgage payment, prepare for a huge drop in your credit score and even more trouble if you keep missing payments.

Remember, a mortgage is a privilege, and you must be responsible, or bear some pretty serious consequences.

Source: thetruthaboutmortgage.com

Why Are Mortgages Cheaper Than Rent?

Mortgage Q&A: “Why are mortgages cheaper than rent?”

Today we’ll discuss why mortgages often appear to be less expensive than a monthly rent payment, despite allowing you to build precious home equity.

For example, you might be shopping mortgage rates and see a sample loan amount of $240,000, along with a hypothetical interest rate.

Let’s pretend that rate is 3% and the loan program is a 30-year fixed, the most popular option available.

This would result in a monthly payment of roughly $1,012. Sounds pretty darn cheap, doesn’t it? Especially with how much rents are these days. But there’s more to the story.

The Mortgage Payment Isn’t Everything, Not Even Close

Monthly Cost Homeowner Renter
Mortgage payment $1,012 $0
Rent $0 $1,843
Property taxes $312.50 $0
Homeowners insurance $125 $0
Repair/maintenance $200 $0
Utilities (water/trash/etc.) $250 $0
Total expense $1,900 $1,843

While an advertisement might highlight the monthly mortgage payment, especially when mortgage rates are low, it’s just the tip of the iceberg.

I assume a lot of folks could afford a monthly housing payment of $1,012 in most parts of the country these days.

That’s well below the U.S. Typical Monthly Rent (Zillow Observed Rent Index) of $1,843 as of July, the latest data reported.

In fact, it’s nearly half of the typical rent Zillow is reporting, which tells me a mortgage is a screaming bargain, at least on the surface.

But the $1,012 mortgage payment isn’t your all-in monthly housing expense. It’s really just a starting point.

After all, the typical U.S. home is valued around $300,000, so a $240,000 loan amount assumes a 20% down payment.

One of the biggest reasons more renters aren’t homeowners is due to a lack of down payment funds.

Many renters could probably muster a $1,012 monthly mortgage payment, but how many could come to the table with $60,000 cash?

Sure, there are low and no down payment mortgage programs out there, but even then there’s more to it.

There Are Many Other Monthly Expenses That a Homeowner Must Pay

Assuming you can qualify for a home loan after coming in with a sufficient down payment, you’ve got more expenses to worry about than a renter.

As I’ve said before, a mortgage payment is often expressed as PITI, which stands for principal, interest, taxes, and insurance.

That super low $1,012 is just the first half of the acronym, P&I. If you want an apples-to-apples comparison, be sure to include the T&I as well.

Using our same hypothetical $300,000 home purchase, we’ve got to add property taxes and homeowners insurance.

These costs are often paid out of an escrow account monthly, and thus increase your actual mortgage payment to the lender.

In California, you might pay around 1.25% in property taxes annually, or $3,750 per year. Broken down monthly, it’s about $312.50

With regard to insurance, you could pay anywhere from $1,000 to $3,500 annually, which is $50 to $300 a month in added costs.

Let’s pretend it’s $125 per month, which together with the $312.50 pushes the monthly payment up to $1,450. Still cheaper than rent!

Now Let’s Add Some Utilities and Maintenance to the Equation

Renting is pretty awesome in that you aren’t responsible for much more than your own personal belongings.

Everything inside the unit that’s bolted down is mostly the landlord’s problem, assuming it breaks.

For example, the landlord is on the hook if the fridge or washer/dryer malfunction, or if the HVAC system fails.

The renter simply calls the landlord and tells them it need to be fixed, on their dime.

If you’re the homeowner, these problems become yours, and you better believe there will be something, each and every year.

As such, you should generally earmark a couple hundred bucks a month for potential repairs and maintenance. It could in fact be a lot more than that, but at least start there.

Then there are the monthly utilities, which may have been paid by your landlord, or perhaps baked into the rent.

As a homeowner, you’re now paying for trash, water, sewer, etc. out of your own pocket each month.

Let’s add another $250 a month in utilities to the mix, along with the $200 in repair/maintenance.

We’re now up to $1,900 a month all in for your house, a far cry from the $1,012 you may have seen advertised.

It’s nearly double the original “estimated payment” you saw, which made homeownership look so enticing.

And remember, that monthly payment requires a hefty $60,000 down payment. If you don’t have that, expect an even higher monthly outlay, and possibly mortgage insurance as well.

Be sure that your rent vs. buy calculator factors in all those costs and doesn’t minimize or ignore them.

Homeowners Get Money Back Each Month They Own

Now the good news. Even if monthly rents and total housing payments are close to one another, you have a big advantage as a homeowner.

You essentially get “money back” each month you own your home or condo in the way of equity.

Remember the PITI acronym above – well, the first letter stands for principal and that’s money you pay to reduce the amount owed to the lender and accrue home equity.

For example, in the first year you pay about $400 per month toward principal, or $5,000 over 12 months.

That’s $5,000 in ownership, something the renter doesn’t get. Over time, you accrue more and more of this home equity until your mortgage is paid in full.

And once it is, you own your property free and clear, and only need to pay the taxes and insurance, along with utilities and maintenance.

At that point, your monthly payment could be well below what a renter pays for a comparable property.

You also wind up with a huge asset that you can sell for a lot of money one day, or pass along to a family member.

The renter just keeps paying rent and has nothing to show for it. They may also see their monthly rent increase each year during that time.

Meanwhile, the homeowner with a 30-year fixed could enjoy relatively stable payments for decades, less any minor adjustments in taxes and insurance, even as the value of the dollar erodes.

Source: thetruthaboutmortgage.com

Mortgages for Doctors: Expanded LTVs and Large Loan Amounts

If you’re a doctor, resident, or even a veterinarian, getting a mortgage can be a little bit easier thanks to so-called “physician mortgages” offered by most major lenders.

Just about every bank offers a special mortgage program for doctors, including large commercial banks like Bank of America and small local credit unions as well.

The names of these programs, along with the guidelines and perks, will vary from bank to bank. They’re typically not heavily advertised, so you may have to do some digging to find all the details.

But they all seem to have two things in common; large maximum loan amounts and high loan-to-value ratios (LTVs).

My assumption is lenders are keen to offer these loans to future doctors because they’ll be good clients with lots of assets, ideally kept with the bank. In fact, you may need a prior banking relationship to get approved.

What Is a Physician Mortgage?

doctor mortgage

  • A mortgage designed specifically for doctors, residents, fellows, and interns
  • As well as dentists, orthodontists, pharmacists, and veterinarians
  • Offers more flexible underwriting like higher loan amounts and LTVs and no mortgage insurance
  • Applicants can get approved regardless of medical school debt and/or limited employment history

In a nutshell, a “doctor mortgage” is a home loan designed specifically for physicians that offers flexible underwriting guidelines and unique features a traditional mortgage loan may not offer.

But we’re not just talking medical doctors (MDs). These loan programs are often available to a wide range of disciplines, including dentists, orthodontists, veterinarians, ophthalmologists, and even pharmacists and lawyers.

If you have any of the following licenses, you might be able to take advantage of one of these specialty programs:

– MD
– DO
– DDS
– DVM
– DMD
– OD
– DPM
– PharmD

Additionally, you can often be a resident, fellow, intern, or practicing physician to qualify. So they’re pretty flexible in terms of where you’re at in your career.

This is especially true if you’ve yet to start a new job, but have an employment contract in hand.

Banks and lenders know you’ve got a lot of earnings potential if you’re going to be a doctor, even if you don’t have the down payment funds necessary to buy your first home. Or even the pay stubs to document your income.

It’s a common problem, thanks to the high cost of medical school, and the fact that doctors, like anyone else in school, don’t get paid the big bucks until they’ve completed their training.

Instead of saving for a down payment, these individuals might be busy paying off costly student loans.

Compounding this is the fact that someone who will be highly compensated in the near future might be looking at a very expensive home purchase.

This explains why physician mortgage programs tend to allow for higher loan amounts than typical loan programs, along with higher LTVs. Those are certainly the two main distinctions.

Doctors Can Get a Mortgage with No Money Down

  • Physician mortgages come with flexible terms including low and no-down payment options
  • And often allow for very large loan amounts to suit home buyers at all levels
  • This is necessary because doctors tend to purchase very expensive properties despite being green in their career
  • These tailored programs can make it easier to get approved for a home loan without additional scrutiny

Many of these programs allow doctors to get a mortgage with no money down, something most individuals can’t readily take advantage of unless they’re a veteran or buying in a rural area.

You might see something like 100% financing up to $750,000 or $850,000 loan amounts, and just 5% down for $1 million-dollar loan amounts, assuming you have a decent credit score.

That’s a non-conforming loan amount (jumbo) with zero down payment requirement. Good luck finding that elsewhere.

Additionally, doctors might be able to get that level of financing without private mortgage insurance (PMI), which is typically required for a loan amount above 80% LTV.

The hitch is that even if PMI isn’t explicitly required on high-LTV mortgages, it’s generally just built into the rate.

So instead of say a mortgage rate of 3.75%, you might pay 4% instead. You’re just charged a different way.

These Lenders Understand Your Employment Situation Better

  • Banks and lenders that specialize in physician mortgages will be better equipped to get you approved
  • They should have an easier time navigating your unique financial and employment situation
  • This could mean a faster loan process and one that is more likely to make it to the finish line
  • Conversely you might run into trouble with conventional lenders that aren’t familiar with how doctors get paid

Another perk is that the bank or lender (or credit union) offering this type of loan should have a better understanding of your situation.

After all, they’ve done it before, likely hundreds or thousands of times, so they should know how to navigate the process.

Instead of wondering what documentation they’ll need to get your loan approved, they’ll likely be familiar with paperwork requirements and the handling of student loan debt when it comes to your DTI.

Ideally, this means you’ll stand a better chance of getting approved for a mortgage with fewer snags or gotchas.

This can be really important if you’re relocating to a new city and trying to nail down living arrangements, especially in a competitive housing market.

Doctor Mortgage Loan Programs

  • Home purchase and refinance loans
  • Available on primary residences and second homes
  • Single-family residences, multi-unit properties, condos/townhomes
  • Fixed-rate options: 30-year, 20-year, 15-year, etc.
  • Adjustable-rate options: 5/1, 7/1, 10/1, etc.
  • Interest-only options to maximize cash flow

As far as loan options go, just like normal mortgages you can get a fixed-rate loan or an ARM on a home purchase or a refinance.

So if you want to play it safe with a 30-year or 15-year fixed, no problem. But if you want to save some money, an adjustable-rate mortgage could also be an option.

Some doctors may favor ARMs because of the lower monthly payment, and the fact that they may sell or refinance before the initial fixed period ends.

For example, you might buy a starter home before upgrading a few years later, all while the interest rate is fixed if it’s a 5/1 or 7/1 ARM.

And if the terms of a physician mortgage aren’t as attractive as a typical mortgage, it might make sense to go with an ARM early on.

After all, you might move up to an even larger home once you’re more established. Or you could relocate to a different city for a new position.

Perhaps you’ll be able to pay down a large chunk of your mortgage balance early, making the type of loan you go with less significant.

Consider that when deciding if mortgage points are worth it because you might not keep your loan long enough to justify the upfront front.

Veterans may qualify for a $0 down VA loan

Minimum Down Payment for a Physician Mortgage

  • 100% financing on loan amounts up to $750,000
  • 95% financing on loan amounts up to $1 million
  • 90% financing on loan amounts up to $1.5 million

While these programs can certainly vary from lender to lender, there seems to be a somewhat standardized down payment structure.

From what I’ve seen, the tiers above are the most common requirements for these types of loans.

Generally, you can get a no down payment loan up to $750,000, and 5% down for loan amounts to $1 million.

At $1.5 million, you might be required to put down 10%, depending on the lender in question.

The main difference between banks might be maximum financing, with certain banks allowing much higher loan amounts than others. Or some offering up to $1.25 million with just 5% down payment.

Be sure to put in the time to shop around if you’re buying a super expensive home, as these minimums and maximums range quite a bit.

Which Banks Offer Doctor Mortgages?

As noted, just about every major bank out there has a program suited specifically to doctors and other medical professionals.

The same goes for independent mortgage brokers, who may be partnered with wholesale lenders that offer these programs.

Chances are your financial planner will have a referral or send you in the right direction. Just be sure to look beyond their preferred vendor…

In terms of specific banks, I’ve listed several below to give you an idea of qualifying criteria and options.

For example, Bank of America can close 90 days before you start a new job if you’re a resident or a fellow.

BMO Harris offers flexible debt-to-income underwriting guidelines for physicians and no income history requirement (proof of future income is required).

Fifth Third Bank allows established physicians and dentists to finance up to $750,000 with no down payment when purchasing or refinancing a home loan.

Huntington Bank allows 90% financing up to $2,000,000 if you have an active employment contract with proof of sufficient income and reserves.

KeyBank will go all the way up to $3.5 million loan amounts, and eligible property types include owner-occupied primary residences and second homes.

Both Regions Bank and Ruoff Mortgage pitch the no down payment and no PMI requirement, both of which are more flexible than standard loan programs.

Meanwhile, a TD Bank Medical Professional Mortgage can consider your overall earning potential while ignoring certain student loan debt to sidestep DTI constraints.

Finally, the Union Bank Doctor Loan Program allows loan amounts as high as $5 million if you want your dream house today instead of later.

And they offer interest-only adjustable-rate options if you’re looking to maximize cash flow and put your money to work elsewhere.

Be Sure to Consider Traditional Mortgage Options Too

  • You don’t necessarily need a physician mortgage if you’re a doctor
  • Traditional loan programs could be perfectly suitable and cheaper
  • Explore all home loan options to ensure you don’t miss out on a better deal
  • A direct lender or mortgage broker might offer a lower mortgage rate than the big banks

It should also be noted that the more flexible guidelines associated with a doctor mortgage don’t come free of charge.

While the lender is probably happy to offer financing to a well-qualified borrower with excellent earnings potential, they will often charge a higher interest rate in exchange.

Once you are able to pay down your mortgage, it could make sense to look into refinancing to a traditional mortgage, especially if your LTV is low enough to avoid mortgage insurance and most pricing adjustments.

These loans typically do not have a prepayment penalty, so you should be free to refinance almost immediately.

If you’re paying down a mortgage at 95% or 100% LTV, chances are you’re paying a lot more in interest than you otherwise would with a lower LTV mortgage, such as one at 80% or less.

Also be sure to shop both traditional and physician mortgages to determine which is the better option.

You might not need to get a mortgage via one of these special programs if you have down payment funds available, or even a gift for down payment from a relative.

Doctor Mortgage Loans in Review

  • Can be a resident, fellow, practicing physician (or even a veterinarian, dentist, pharmacist, or lawyer)
  • Ability to obtain financing before your job starts and use projected income
  • Can be a purchase or a refinance, sometimes second homes permitted
  • Multi-unit properties and condos/townhomes should be OK
  • Allow for large loan amounts (up to $1.5 million+)
  • Often do not need a down payment for loan amounts up to $750,000
  • Typically do not charge private mortgage insurance (PMI)
  • Flexible qualifying guidelines with regard to student loans and DTI
  • Generally need good credit (720+) to qualify
  • Both fixed and adjustable-rate options available (sometimes interest-only)
  • Mortgage rates may be higher than traditional loans
  • Banks may require you to open a checking/savings account
  • Also consider a mortgage broker who may be able to link you with a wholesale lender

Source: thetruthaboutmortgage.com