Medical Professional Home Loan Programs (CRNA, PA, DPT, DMD, DDS, DVM, Nurses and Pharmacists may Qualify)
Student loans have become prolific over the last decade, according to the Federal Reserve; U.S. students currently owe over $1.5 trillion in private and federal loan programs.
Since 2004 student loan indebtedness has soared 302%, roughly ten times the growth in U.S. GDP during the same period. Meaning that student loan indebtedness has expanded ten times as fast as our economy – something has to give.
$1.5 trillion is such a large number it’s hard to fathom but consider this, the total outstanding debt in the U.S. for auto loans is $1.1 trillion and $977 billion for credit cards.
Exacerbating the burden, borrowers cannot default on their federal student loan debts like they can on a mortgage, credit card, or car loan. That debt is likely to saddle indebted borrowers for decades and can become a major hurdle in qualifying for a home loan.
Much of the rapid expansion in student loan indebtedness has come post the 2008 to 2010 mortgage meltdown, while mortgage credit and underwriting standards are near their most conservative on record. This combination of highly leveraged borrowers and constricted mortgage availability has created a significant challenge for many families to qualify for a home loan.
What can be done – are there any solutions available for the highly educated and indebted?
Relying on deferment, forbearance, or income driven repayment programs to cope with the indebtedness and to keep from getting behind in their payments helps borrowers stay current with minimum student loan payments but is an additional hindrance to qualifying for home loans. Most conventional and government loans like FHA, VA, and USDA, will not recognize any form of deferral or forbearance in student loans.
Mortgage credit guidelines require underwriters to qualify the would be home buyer at a fully amortizing payment, or if not available, will default to a percentage of the outstanding student loan balance to estimate a monthly payment. In many cases, the fully amortizing payment amount is more than the borrower can handle and blows the qualifying debt to income ratio beyond underwriting limits. This makes it impossible for many borrowers to qualify for traditional mortgage financing.
For example, if a client has an income of seven thousand dollars per month, their total outgoing expenses including the new mortgage, student loans, and all other indebtedness that shows on credit cannot exceed 43% or $3,000 (generally speaking – there are some exceptions). If a borrower has $50,000 in student debt that is deferred, in forbearance, or income driven repayment with a zero payment, the underwriter still has to calculate a payment. That payment will typically be in the one to one and a half percent per month range, adding another $500 to $750 per month to the qualifying debt to income ratio.
In many instances, adding the fully amortizing payment or percentage of outstanding balance payment to the overall debt to income ratio will disqualify the indebted borrower from qualifying for a mortgage loan.
If you have found yourself caught in this situation there is hope and fortunately a new breed of home loan programs for professionals appear to be emerging. For years physicians and dentists have had access to “physician home loans” or “doctor mortgages”, which allow qualifying MDs to exclude student loan debts or qualify based on income driven repayments. Some in the mortgage industry decided that the default rates were so low when lending to doctors, that they allowed MDs to qualify without counting their student loans into the debt to income ratio calculation.
Similar underwriting guidelines are now being applied to other professionals such as nurses, CRNA, PA, DPT, DMD, DVM, DDS, pharmacists, JD, CPA, and several other professional designations.
Mortgage lenders have determined that homeowners with these professional designations are excellent credit risks and have begun to loosen the underwriting guidelines specifically around student loans and self-employment history.
The expansion of these more liberal underwriting guidelines to professionals beyond MDs may be coming at just the right time as there are more medical professionals than ever seeking Public Service Loan Forgiveness (PSLF), which in many instances extends both the length of time and amount of student loan indebtedness for borrowers.
To qualify for PSLF you are required to make at least 120 payments, all of which can be reduced payments under one of the qualifying income based repayment programs. For these professionals in public service that hope to qualify for PSLF, the game is to pay as little as possible over those 120 qualifying payments. Thus the loan balance and repayment term are often extended beyond what they would be if the borrower had a strategy of aggressive self-repayment.
On September 19th 2018, the U.S. Department of Education reported that a meager 96 applications had been approved for PSLF and that 99% of the applicants were rejected. You read that right, out of 33,300 applications for PSLF; only 96 borrowers have had their debt discharged. It would be impossible for anyone to know how this will turn out for the tens of thousands of PSLF applicants in the long term, but it’s obvious at this point that student loan indebtedness is going to be a limiting factor for longer than many borrowers had anticipated.
Professionals that have high levels of student indebtedness or complicated non-employee (W-2) income structures should rest a little easier knowing there are potential solutions for them. Qualifying is obviously not guaranteed, but there are specialized loan programs, which are beginning to craft solutions to the student loan mania that we find ourselves in currently.
Seeking these specialized loan programs may not be easy and many local banks or credit unions may not facilitate or be knowledgeable regarding these programs. We have several different loan programs geared towards medical professionals and can help overcome the challenges that student loans and complicated income structures present.
If you have run into a challenge with another bank or loan officer, I would invite you to reach out to me for further discussion on what solutions we might have for you.
Josh Mettle NMLS #219996 is an industry leading author and mortgage lender, specializing in financing physicians, dentists, CRNA, and other professionals with highly specialized professional loan programs. You can get more great real estate and mortgage advice here or his by visiting his book site. Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages. Josh is dedicated to helping physicians and other professionals become more financially aware and able; listen to “Physician Financial Success” podcast episodes or download Josh’s latest tips and advice here.