Physician Construction Loans: How to Find Lenders

Access to physician construction loans is a fringe benefit of being a doctor, giving you low down payment options to build your dream home.

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Physician Construction Loans: How to Find Lenders

Key Terms

  • Physician construction loans are available to medical doctors, lawyers, and DVMs (sometimes).
  • You can still qualify for a physician loan even if you’re in fellowship or residency.
  • Borrowers do not have to pay PMI with a physician construction loan.
  • You need at least a 670 credit score to qualify for a physician construction loan.

What is a physician construction loan?

A physician construction loan is a type of physician mortgage loan that allows doctors to purchase land and build their own homes. In practice, it acts as a combination of a physician mortgage and a construction loan, with special terms and benefits only available to medical doctors.

Physician construction loans are typically offered by banks, credit unions, and private lenders. The terms of these loans can vary depending on the lender and the specific project being financed. In most cases, these loans will have a fixed interest rate and a repayment term of one to three years. But no need to worry! If you don’t happen to have a few hundred thousand dollars sitting around, you have the option to convert to a traditional physician mortgage after the project is finished. 

If you are planning to build your own home, a physician construction loan can be an excellent way to finance the project. These loans offer competitive interest rates and flexible repayment terms, making them an attractive option for many borrowers and act as an alternative to going through the home buying process and spending hours searching the NMLS just to achieve home ownership.

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Physician construction loan eligibility for medical professionals

Most medical professionals qualify for physician construction loans, even if they’re still medical residents or in a fellowship. In most cases, as long as you’re an MD, DDS, DO, DPM, or DMD, you’re eligible to apply for one of these loans. Occasionally, we will see eligibility for DVMs.

If you’re nearing the end of your residency and want to use your new attending income, you need to be within 60 days of your employment start date at the loan close date and you’ll need an employment contract; otherwise, you’ll need to use the prior year’s income. Keep in mind that some physician construction loans have a time limit and will not approve physicians that apply more than 10 years after their residency. 

How much can I borrow using a physician construction loan?

If you’re a physician looking to build a new home, you may be wondering how much you can qualify for with a physician construction loan. Construction loans are typically based on the value of the property after it is completed, so it can be challenging to determine how much you’ll be able to borrow upfront. However, there are some ways to estimate your loan amount and get an idea of what you can expect. 

Determine land value

The first step is determining the value of the land where your new home will be built. You can do this by contacting a real estate agent or appraiser in the area. Once you have an estimated value for the land, you’ll need to factor in the construction cost. This includes the cost of materials, labor, and any other associated expenses. The best way to get an accurate estimate is to speak with a contractor who is familiar with the area and can give you a realistic estimate of what it will cost to build on your chosen location. 

Maximum LTV for a physician construction loan

Your loan to value level is affected by the total amount financed. If your loan to value happens to reach beyond a certain limit, you might have to come up with a larger down payment. Here are some general guidelines you might find while searching for a loan. Keep in mind that these numbers will change from lender to lender and situation to situation, but they’re a good baseline of what you can expect out there.

  • Up to $750K: Max of 95% Loan to Value
  • $750K to $1 Million: Max of 90% Loan to Value
  • $1 Million to $1.5 Million: Max of 85% Loan to Value 
  • $1.5 Million and Higher: Max of 80% Loan to Value

In most cases, construction loans have a max LTV percentage of 80%, but as you can see, they’re a bit higher for physician/doctor loans. If you’re a non-permanent resident alien, your max loan to value percentage is 80%- no matter what the loan amount.

How much can you finance?

You can use this simple calculation to get a ballpark estimate of how much you can finance:

( Land Cost + Building Cost ) * Maximum Loan to Value %  = Total Amount You Can Finance

Lenders look at your DTI and credit score

Once you have an estimated total cost for the project, you can begin shopping around for a construction loan. When applying for a loan, lenders typically look at two factors: your credit score and debt-to-income ratio. Your credit score is important because it shows lenders how likely you are to repay your loan on time. A high credit score means you’re less likely to default on your loan, which makes lenders more willing to lend to you. On the other hand, a low credit score could make it more difficult to get approved for a loan or could result in a higher privat. 

Your debt-to-income ratio is another important factor that your loan officer will consider when reviewing your loan application. This ratio compares your monthly debts (including your mortgage payment) to your monthly income. Lenders want to see that you have enough income to cover your monthly debts and some extra money left over for things like savings and emergency expenses. A high debt-to-income ratio could make it harder to get approved for a loan or could result in a higher interest rate. 

Physician construction loan cash reserve requirements

Many lenders ask that you have 10% of the total build cost in assets- in addition to your down payment, but not including the cost of land. For instance, if you want to finance $800,000, you need to have at least $80,000 saved up in assets, like a 401K, pension, other retirement accounts, or checking or savings accounts. Lenders build this into the loan requirements to ensure that you’ll be able to cover any overages during the building process.

Physician construction loan credit score requirements

In most cases, you need a credit score of 670 or higher to qualify for a physician construction loan, or 700+, depending on the lender. Before approving you for a loan, lenders want to ensure they’ll get paid, and a higher credit score reduces their perceived lending risk. This means that if you have a high credit score, you can usually get by with a higher debt-to-income ratio- giving you more options when it comes to how much you can finance.

Find the right physician construction loan lender

Once you’ve determined how much you can afford to borrow and what kind of interest rate you’re likely to qualify for, you can start shopping around for physician construction loans from different lenders. It’s vital to compare offers from several lenders before selecting one, as interest rates and terms can vary significantly from one lender to another. Be sure to read over the fine print before signing any loan documents so that you understand all the costs associated with taking out and repaying the loan.

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How do physician construction loans work?

Physician construction loans can seem a bit complicated at first, but as a doctor, you’re probably used to overcoming challenges. Once you understand how they work, they can be an excellent option for financing your home construction project. Here’s a quick rundown of how construction loans work:  

1. You’ll need to qualify for a physician construction loan just like you would any other type of loan. This means you’ll need to have good credit and a steady income.  

2. The lender will give you a loan for the cost of the materials and labor for your project.  

3. You’ll need to make interest payments on the loan during the construction process.  

4. Once the construction is completed, you’ll need to pay off the entire loan in full.  

5. If you sell the home before you’ve paid off the loan, you’ll need to pay back the entire loan plus any interest that has accrued. 

How financing works for a physician construction loan

For instance, let’s work through a scenario. Say you’ve talked to a loan officer, you explained your situation, and they come back with the following financing limits:

  • Max LTV of 95%
  • Max DTI ratio of 40%

Let’s also assume that you have a gross income of $200,000, and the total acquisition costs+land costs come to $800,000.

To figure out how much you’re going to be able to finance, start by using the LTV percentage.

(Maximum LTV ratio of 95%) * $800,000 = $760,000

Now, let’s move on to the DTI or debt to income ratio. Keep in mind that we’re assuming you have to put down 5%, or $40,000. We’ll also look at the DTI ratio to see if that changes the total amount you’re able to finance.

Assuming you’ve got a DTI of 40%, you’ll need to keep your monthly payment below $6,666 per month. We came up with that number using the following formula:

($200,000 Gross Income) * 40% / 12 months = $6,666

Remember that the max amount you’re able to finance in this scenario is $760,000, so we’ll use that number to estimate your monthly payment.

A loan of $760,000 with an interest rate of 6% would have a monthly payment of $4,557, not including insurance, taxes, or other fees. This is significantly lower than the max monthly payment we found above of $6,666- meaning you should have no problem getting this amount financed. 

Physician construction loan underwriting process and closing

The physician construction loan underwriting process is relatively straightforward. You’ll need to provide proof of income, either W2s or P&L statements, and 2+ years of tax returns. If you plan to use income from a new job, you’ll also need a contract that shows the job starts within 60 days of your closing date. 

Depending on the lender, you may have the option of utilizing a “one-time close,” which means you get a locked-in rate, and you only pay one set of closing costs and fees. At the end of the construction period, a “one-time close” physician construction loan will get converted automatically into a traditional conventional loan. If the lender uses a two-time closing process, you may see rate changes between the two closings, because you’ll need a second mortgage to pay off the construction loan.

You may also run into appraisal issues that could result in a lower home value, which may change your LTV numbers. Additionally, if your income changes in between the two closings, that may affect your DTI ratio, which could change the prospective terms of your loan.

How do physician construction loan payments work?

Paying builders

In most cases, builders will want to get paid in installments as the project proceeds. They need to pay for labor, materials, supplies, fixtures, and other construction necessities. Most lenders will have a process by which they vet and pay builders over the life of the project. 

Making payments during construction

Physician loan borrowers generally have to make interest-only payments on the total loan amount they requested. 

Paying the physician mortgage loan after construction

Once construction is complete, your lender will change the loan into a standard amortized mortgage. After this happens, the loan will transform into a standard physician mortgage. At the end of the project, you want to make sure that all of the builders and subcontractors have been fully paid- because you don’t want a lien on your brand new property.

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Physician Construction Loan FAQ

A physician construction loan is a type of loan designed explicitly for physicians looking to finance the construction of a new property. This type of loan typically offers competitive interest rates and terms and can be used to finance the construction of a primary residence, second homes or, in some niche cases, investment properties.

Several benefits come with obtaining a physician construction loan. For one, this type of loan can offer competitive interest rates and terms. Additionally, a physician construction loan can be used to finance the construction of a primary residence, second homes or, in some niche cases, investment property. This flexibility makes it an ideal option for physicians looking to build their dream single-family home after years in medical school.

To qualify for a physician construction loan, applicants must meet specific eligibility requirements. For instance, applicants must have a valid medical license and be employed by an accredited medical facility. Additionally, applicants must have good credit and sufficient income to qualify for the loan.

In most cases, you need to be an MD, DDS, DO, DMD, or DPM. Occasionally we see eligibility for lawyers or DVMs.

Every lender is different, but many lenders have limits on how long ago you completed your residency, and they may not approve physicians that are ten years out after the start of their residency.

You can qualify with an LTV anywhere between 80% and 95%. Typically, the higher the value, the lower the LTV. For example, for loans up to $750,000, there is a max LTV of 95%, while a loan of $1.5 million or higher might have a maximum of 80% loan to value. In short, your max LTV is highly dependent on your individual situation.

Many lenders require borrowers to have 10% of the total build cost in assets plus the down payment. For instance, if you’re financing $500,000, you’ll need to have $50,000 in liquid or semi-liquid assets. It doesn’t always need to be sitting in a checking account but it probably can’t be cases of rare wine.

Medical doctors and dentists graduate with significant student loan debt, which can be a negative impact on your debt-to-income ratio. Loan programs that offer physician construction loans know this and you can expect that your student loan debt will be treated in a similar fashion as if you were applying for a typical physician home loan.

You need at least a 670 score to qualify for most physician construction loans. Some lenders require a score as high as 710 at the minimum. If your credit score doesn’t meet the minimum, review your credit cards, line of credits and other credit report items before you apply with a physician construction loan lender for credit approval. Keep in mind that a lower credit score means you’ll pay a higher rate in the construction loan.

Nope! In the vast majority of cases, you are not required to pay PMI, aka Private Mortgage Insurance. With most mortgages, you need to put down 20% or more to to get a deal with no PMI, but there is typically no such requirement with most physician construction loans. If the bank is charging you PMI, they will be required to tell you so in the disclosures.

You aren’t likely to refinance a physician construction loan because they are typically used only used for the construction phase of the project. Depending on your loan option, you’ll either have a single-close or multiple-close construction loan. Once your construction loan converts into traditional financing (e.g. a physician home loan), you can then consider refinancing that loan if it makes sense.

Joshua Holt is a licensed mortgage loan originator (NMLS #2306824) and founder of Biglaw Investor. His mortgage expertise lies in the areas of professional mortgage loans, particularly for lawyers, doctors and other high-income professionals. Prior to Biglaw Investor, Josh practiced private equity mergers & acquisition law for one of the largest law firms in the country.

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