If you are a medical doctor, chances are that you are no stranger to loans. You may have taken out student loans to get through medical school, or you may be familiar with physician mortgages. Even if it feels like you are drowning in debt after med school, chances are you may need another loan or two throughout your career. Here is a guide to the most popular loans for doctors.
Private Practice Loans for Doctors
When it comes to financing a medical practice, doctors face different loan challenges than other small businesses. While qualifying for loans may be easy because banks want your business, you need to understand some of the restrictions hidden within the terms of their loan products. In other words, you need to shop for the best terms and the best service and understand the fine print. You should know exactly what property is listed as collateral to secure the loan and if the repayment schedule is realistic, based on your practice and income.
As a physician, you will probably be easily approved for a loan based on your income, collateral and the fact that a bank wants your other business (savings, checking, CDs or money market accounts). But be careful not to borrow in ways that end up compromising your future finances or prevent you from fully benefiting from the capital. Here are some of the loan and financing options available to help fund your medical practice.
Bank Loans for Doctors
Bank loans are often a great option for private practice doctors because banks will want to work with your business. You may find that bank loans have lower interest rates, longer payment terms or other perks. However, banks typically require a lengthy application process that takes at least 30 days to complete. The lender will probably require a personal guarantee for a small practice loan, so you need to think about the possible repercussions.
If you have a partner, your loan may include a “joint and several” clause, which holds each partner within the practice individually liable for the loan if it goes into default. Never assume that leaving the practice releases you of that loan obligation. You should only choose long-term debt (loan lasting more than one year) for long-term needs.
You must provide a detailed business plan outlining your business, tax and bank records, and collateral in case you cannot repay the loan. Some banks say no to new start-up practices, so check if there is a time-in-business requirement for a certain loan or financing option.
Lines of Credit for Doctors
A line of credit is a good solution for a physician’s short-term funding needs. You can use a business line of credit to purchase equipment, meet immediate business needs or hire more staff. While a line of credit is flexible, a longer-term loan should be used for anything that requires extended payments, like buying out a medical practice or purchasing real estate property for the practice. To avoid hefty interest payments, lines of credit typically should be paid off within a year.
Small Business Administration (SBA) Loans for Doctors
Loans to medical practices backed by the SBA, a government-backed agency, are on the rise. The SBA offers several types of lending to small businesses and physician practices. These SBA loans can have lower interest rates and longer repayment terms than other loan options, even bank loans.
According to the SBA, borrowers need to provide more documentation than private lenders require and express a clear business need. You must provide a detailed business plan, which includes a current overview of your business as well as the future projections and goals. For example, if you are borrowing money to purchase a new diagnostic device, you need to show the figures of exactly how much income it will generate and how this will affect your bottom line in the years to come. Your personal finances, resume, and ability to manage the practice may also be scrutinized as part of the approval criteria.
In addition, it can take 90 days or longer to close on your loan. Collateral and liability vary depending on which loan product you choose, so it is vital that you read all the fine print regarding what you will be liable for if the loan goes into default.
Alternative lending can offer useful flexibility in how you repay your loan and lenders typically have many creative loan options to choose from. For example, some may offer a payment plan that fluctuates with your sales volume or provide a shorter term loan at a lower amount than a bank might be willing to offer. If flexibility and ease are important, alternative lending is a perfect funding solution.
Small business loans provided by alternative lenders typically take less time and their application and approval process may be easier to successfully navigate. Alternative lenders also tend to look more at your business potential than your past credit history, so having less than perfect credit is not an issue.
However, alternative lenders typically mitigate this added risk for the lender by requiring higher interest rates or shorter repayment periods. It is important to understand how your monthly repayment will impact your current revenue and expenses.
Physician Mortgage Loans
Whether you are in private practice or employed by a hospital, you are likely eligible for a physician mortgage loan. Physician mortgages allow medical professionals to get a mortgage without private mortgage insurance, even with six-figure student loan debt. Essentially, financial institutions are willing to bet on your future as a physician, even when your current debt looks brutal.
Who Can Get a Physician Mortgage Loan?
Doctors with an M.D. or a D.O. are eligible for a physician mortgage loan. Some loans are also available for doctors with a D.P.M. degree or dentists (D.D.S. or D.M.D.). If you hold any doctorate in the medical field, it is worth asking your mortgage lender about physician loans to see what your options are.
Physician mortgages are only available for the purchase or refinance of a primary residence. You cannot purchase an investment property or a second vacation home with a doctor loan.
A physician mortgage loan is different from an FHA or conventional mortgage in several beneficial ways. Physician mortgages are designed to help doctors get home loans without costly fees and rejection for high debt-to-income (DTI).
Physician mortgage loans allow doctors to get home loans without private mortgage insurance (PMI), which can be costly, adding up to thousands of dollars over the course of the mortgage loan. PMI is usually required for any home loan with a down payment less than 20% of the total loan amount, but doctors are able to obtain a mortgage with no private mortgage insurance regardless of the down payment amount.
In addition to the PMI savings, doctors face significant obstacles to home ownership with large amounts of student loan debt. Physician loans make it possible to qualify for a home loan even if your debt-to-income ratio is less than ideal. If your student loans are in deferral, your lender may ignore them when determining your eligibility.
While physician loans have huge perks, remember that you are still taking out another loan and will have additional expenses related to home ownership. You will need to make monthly mortgage payments on the principal and interest, in addition to any student loan payments. You will need to have enough money saved to cover closing costs, which includes expenses like underwriting and origination fees.
Unlike rent, you are responsible for property taxes and home repairs. Furthermore, if you might move in the near future, you will have to sell the house, or you will still be responsible for the mortgages, taxes and maintenance. Consider whether home ownership is right for you before taking out a physician mortgage.
Application Physician Loan Requirements
Whether you are applying for a private practice loan or a physician mortgage loan, you will need to provide the loan officer with some proof that you are able to repay your debt obligation. If you are applying for a physician mortgage, you will need to provide typical personal documents for mortgage application, like your pay stubs, employment verification, credit score, assets and liabilities.
If you are applying for a business loan for private practice, you will need business financial documents, revenue, debt obligations and credit history.
All of this documentation is standard for mortgages or business loans, but lenders may be more willing to trust in your future. Since healthcare businesses are reliable and have a proven business model, you may not need to “prove” yourself to the lender.