Special loans for new professionals

©iStockphoto.com / Feverpitched
©iStockphoto.com / Feverpitched

Freshly minted doctors and lawyers are valued for "earning potential," but are warned to beware.

Posted: April 06, 2014

Upon graduation, 2013 figures show, newly minted lawyers who attended public law schools owed about $76,000, and doctors who attended public medical schools owed about $208,000. Those who attended private schools owed even more.

For doctors, the numbers can continue to rise during residencies, some of which last up to six years, if they don't make payments on the interest.

So much debt. Yet, when they're looking for mortgages, lenders love them. That's because these young pros - many of whom land in the Philadelphia region because of its prestigious health systems and law firms - have what's called EP.  

Earning potential. It makes lenders take the long view. Some have designed special programs for future big earners, in hopes that once a physician or lawyer takes out a first-time home loan, that person will seek the lender out again to borrow for a practice, and for a partnership, and for a second home, and so on.

Such special mortgages are serviced by the loan originators. No Fannie Mae and Freddie Mac rules or protections.

Loan-to-value is the driving consideration: Very little down payment is required because the borrower is making - or will be making - a significant amount of money.

"This is an important program for us. . . . The mortgage is a great way to get started," Robert Donovan, regional sales executive, home loan sales, for Bank of America, said of its program for doctors, started in 2010.

Citigroup's lawyers-only program, Citi Private Bank, is 40 years old. Lisa Kohut, team leader and director of the program, said it lent to law firms and individuals, though generally not to those who had just passed the bar.

"Typically, they are senior-level associates and partners," Kohut said, though, even at that level, Citi Private Bank lends at 90 percent loan-to-value, depending on income.

SunTrust Bank's program, started in 2005, is open to licensed medical residents, interns, fellows, and dentists who have completed their initial postgraduation studies less than 10 years from the date of the loan application, spokeswoman Sue Mallino said.

In addition to doctors, Residential Home Funding Corp. offers specialized loans to firefighters, police officers, teachers, nurses, and military personnel in a program it calls "Mortgages for Champions."

The primary difference between its specialized and its conventional loans, said regional manager Ralph DiBugnara, is Residential Home Funding does not charge "champions" banking fees, saving each applicant $1,500 to $3,500.

But unlike some programs, such as Bank of America's, Residential Home Funding includes a doctor's medical-school debt into its income-to-debt ratio calculation.

To appreciate the allure of special loan programs, consider the M.D. experience: After four years of medical school, there is residency - the median salary in the Philadelphia area in 2013 was $47,524.

Family practice and emergency medicine have three-year residency programs. A pediatric oncologist does three years, plus another three for a fellowship. So, many doctors are in their early 30s by the time they start careers.

At Bank of America, a new doctor, 60 days before starting a job, can borrow up to $850,000, on a down payment of 5 percent. All he or she needs is the contract to prove the job, Donovan said. If the work comes with an employer-assisted loan, that can be included in the mortgage calculation.

None of this is a good idea, argues James M. Dahle, 38, editor of the website White Coat Investor. (He's also an emergency physician in a hospital near Salt Lake City.)

Medical residents, especially, think they want a house because they hear that buying one is a smart thing to do, he said. "Which isn't necessarily true, especially when you're only going to be in it for three to six years and will be working 80 hours a week during that time and have no money and owe hundreds of thousands of dollars in moderate-interest debt."

The ideal is 20 percent down over 15 years, he said: "If you can't save up 20 percent of [a house's] value in a year or two, then you probably shouldn't be buying it."

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