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One of the challenges that many new doctors, dentists and other medical professionals face as they enter the professional world is the amount of debt that they already face as a result of taking out student loans – and ending up as a doctor drowning in debt is not the situation that you deserve if you have worked hard enough to earn your medical license. This can present a significant hurdle when it comes to taking out a mortgage to buy a home or to finance the opening of your first office. Many doctors have spent months, if not years, living in an apartment, and are ready to own a home.
This is why there are mortgages that are specially designed to suit the needs of doctors, dentists and other medical professionals who are just out of school and starting their career. Here’s why this is a need – traditional lenders ask borrowers to provide documentation of an income stream that is reliable and proven so that they can pay down their existing debts (including student loans) as well as the mortgage that they want to take out. They analyze a ratio called Total Debt Service ratio, which would be the ratio of repayment obligations on current and proposed debt to proven income. The cap on this is generally 42% of proven income, which generally refers to a guaranteed base salary or a borrower’s track record over the last two years.
If you are a new doctor, your student debt could be heavy – even over $100,000, depending on the medical school you attended. As a resident, you may not earn more than $70,000 your first year, and you’re likely to have a negative net worth, because you haven’t had the time to amass enough assets to counteract your debt at this point. There are also the B21 mortgage rules that kicked in in June 2015, which required that only proven income could serve as qualification for a “high-ratio mortgage loan” insured by CHMC with a down payment of less than 20%. If you’re a newly minted doctor with huge student loan balances, your TDS is likely to exceed 42%.
How To Offset Heavy Debt & Decrease TDS
How can you get around this? Well, traditional lenders may require you to pay down more than 20% so that you can get around the B21 rules. This allows lenders to give you credit for the earning potential you have, depending on your medical specialty. There are also ways for student loans to become payment and interest-free while you’re still in your residency, so your TDS would decrease. If you choose to work in remote or rural areas, there are some loan forgiveness programs.
There are also a few other factors to bear in mind. Often there is a six-month grace period after you graduate but before you have to start making student loan payments, to give you time to sign that first employment contract and get your life up and running. Some doctor mortgages only require that you show an employment contract as proof of income, so if you’re relocating across the country and want to be all settled in before you start your job, that can help. There are some other doctor mortgages that can work with you as long as you’ve started your contract. They will often allow you to extrapolate on income on the basis of your first three months of billing. The tradeoff is that they will often drop your down payment minimum to 5%.
With those things said, there are some other things to bear in mind. You still have to establish credit for yourself. You also have to make payments on your credit accounts on time. If your down payment will be less than 35%, you must have Canadian residency. They may also look at how you spent your student loan money (did you put it all toward your school expenses, or did you spend a lot of it on extras for yourself?).
Down Payment Options for Medical Professionals
The more money you put down, the less of a risk you represent to the bank. You can take your down payment out of savings, or TFSA or RRSP accounts (if you already have those). If there is cash back from the lender, that can be as high as five percent. Do you have a student line of credit? It’s possible that you could use that. You could also sell your car or another valuable asset, or if you have a relative who will give you money for a down payment, that can work too. If you are looking for a mortgage or for a doctor consolidation loan to combine debts, reach out to Amansad Financial, as one of our experts can talk more with you about your own situation and advise you as to the best course forward.