Yes, a Mortgage for a Resident Doctor is Possible!
Perhaps you have just finished university, and are now starting your medical doctor internship at the University of Calgary. Foothills. Perhaps you have finished your medical residency at University of Alberta in Edmonton and starting your practice.
It doesn't matter where you are in Canada, as a new doctor you are likely burdened with heavy student loan debt, a barrier in most cases to qualifying for a mortgage hence homeownership. Yet at the same time, after years of hard work, many young doctors are tired of renting and eager to buy their first home.
Good news for you is that there are a handful of mortgage lenders eager to extend credit to debt-burdened graduates coming out of medical school. Whether you call it a pre-practice mortgage, new doctor mortgage, a medical resident mortgage, or a resident doctor mortgage, these are special mortgages specifically designed to meet the needs of physicians just starting out.
Mortgage Lending Issues for Medical Residents
In a normal mortgage qualification scenario, a borrower is required to demonstrate he or she has a reliable and proven income stream sufficient to service all debts including student loans and the new mortgage. If the ratio of debt repayment obligations to proven income is too low, then no mortgage approval. This ratio is called the Total Debt Service ratio or TDS and is typically capped at 42% of proven income. Proven income means a guaranteed base salary or a 2-year earnings track-record.
Here are the issues a new doctor faces:
- Typically they have heavy student loan debt, which could easily exceed $100,000 depending on where they attended medical school.
- Resident doctors often earn modest salaries in the $60K/yr range, certainly not generous by most standards.
- There is almost always negative net worth
- Effective June 1, 2015 the new "B21" mortgage lending rules kicked in, meaning only proven income can be used to qualify for a CMHC-insured "high-ratio mortgage loan" with under 20% down payment.
- TDS based on debt-to-proven income is almost always far beyond the allowed limit of 42%.
How Lenders Compensate for Residents
Lenders make adjustments to their lending rules as follows:
- Require a larger down payment (20%+) so that the B21 lending rules do NOT apply.
- By avoiding B21, are able to give credit for the doctor’s future earning potential, based on their specific specialization.
- Advise on how student loans can become payment and interest-free while training as a medical resident to improve their cash flow, hence TDS
- Advise on loan forgiveness program for family doctors and nurses who choose to work in rural and remote areas.
- Extend the medical resident mortgage into the first year of employment, hence providing a little more breathing space to get guaranteed base income increased, hence TDS in line for B21 lending rules.
New Doctor Employment Contract
Once doctors are out of residency, the students debt are a factor. However,
- Typically there is a 6 month student debt repayment grace period to get the first employment contract started.
- Some physician mortgages require only an employment contract as proof of income rather than pay stubs, which is helpful for doctors who are relocating for their first job and want to be all moved in before they start.
- Other physican mortgages require commencement of the employment contract and will extrapolate your annual income based on 3 months' worth of billing. In return however, they then lower the minumum down payment threshold to as little as 5%
The Banks are not Doing you a Favour just because You Are a Doctor
Says one lender, "We know their income’s going to jump dramatically when they get out.” But there are other factors to be sure:
- You must still have an established credit record
- You must have a reasonable credit repayment history.
- You must have residency in Canada if your down payment is under 35%
- They are still going to look at you from a risk perspective - are you a good lending risk or on the verge of insolvency?
- Did you spend your student loan money wisely?
- Bigger down payments mean less risk for the bank and this opens you up to better mortgage deals and terms
Down Payment Considerations
Down payment can come from a variety of sources, provided it can be clearly documented: Here are some suggestions:
- Your savings, RRSP, or TFSA accounts (if you are lucky to have any savings!)
- Gifted down payments from an immediate family member are permitted
- Cash-back-from-lender may be available through lender up to 5%
- Your student line of credit may be a posibility
- Sell something of value, like a car.
- For now, residents require 20% down (new doctors with 3 months billing under their belts, as little as 5%)