We often see frustration in our physician communities from locums or 1099 physicians who are trying to secure mortgages but encountering difficulty from mortgage lenders who are hesitant to take a risk on lending to someone without a contract that specifies the stable, reliable W2 income that underwriters like to see. While this can be discouraging for a physician trying to buy a home, know that most locums and 1099 physicians are in fact able to purchase a home. Those with a steady history of locums or 1099 income with 2 years of tax returns tend to have less issues. For those physicians just starting out with self employed income, itt may be necessary to shop around with more physician mortgage lenders to find someone that is willing to be flexible. Below, we’ll explore how physicians without a guaranteed income can still secure a mortgage, and what factors make it easier for mortgage lenders to approve an application in this situation.
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Why is it challenging for a locums or 1099 physician to secure a mortgage?
Mortgage underwriting is aimed at minimizing the risk towards the lender. This means that a bank supplying you a mortgage, in addition to having your house as collateral, is going to want to know that you have the means to pay the mortgage and interest payments.
Generally speaking, most lenders love physicians. They have high incomes, tend to be rule followers and pay their debt, and have a high degree of job stability. In fact, many banks love doctors so much that they offer a product called the physician loan, which allows physicians to bypass normal rules requiring a 20% down payment and allowing them to buy a house for as little as zero money down.
However, physicians working locums or per diem or who are otherwise self employed don’t always enjoy this same ease, particularly if they don’t have a long multi-year track record to suggest that they will have steady income. Without a signed contract that gives the mortgage agent confidence that you will be able to make your monthly payment, lenders often become squeamish.
As such, not infrequently, banks or lenders will have policies against offering self-employed individuals mortgages without additional hurdles. If you are a W2 physician who’s contemplating a change in career plans, secure your mortgage prior to making the switch.
Where and how can doctors get a mortgage if they don’t have 1 or 2 years of filed tax returns as a 1099 or locums?
Some of the bigger banks are very strict about the 2 year requirement, and will give you a hard no.
However, the good thing for physicians is that there are also many banks who are used to making exceptions for physicians through the form of the physician loan. Banks that have these products have different underwriting criteria and bypass a lot of the requirements of conventional loans already.
Therefore, speak with a mortgage lender who regularly does physician loans and works with physicians. These mortgage agents are more likely to be willing to make some exceptions for you because they understand the unique physician financial trajectory. Also, chances are, they have likely worked with 1099 and locums physicians before and have navigated this situation in the past.
Another thing to do is check with local or smaller/boutique banks - they may be more willing to craft a product for you or be flexible and take into account individual circumstances.
What factors will a lender look at before deciding to give a mortgage to a physician who is self-employed?
If a lender is willing to consider issuing a mortgage to a self-employed physician such as a locums or per diem doctor, they will still want to look at your track record so that they know whether or not you’ll be able to afford the mortgage and interest.
They’ll consider how much money you tend to make over a certain period of time, and most will ideally want to see tax returns that span at least 1-2 years – this is why we highly recommend that physicians switching to locums first secure their mortgages. Each lender may approach that time period differently, with some staying hard and fast on a 1 year or a 2 year requirement, while others may be willing to look at a shorter period of time, especially if you have a lot of future gigs already booked with signed contracts or some of the other factors listed below that tilt things in your favor.
Mortgage lenders and underwriters will likely consider trends in your income carefully. If they see steady increases in income, they will feel more comfortable making exceptions for you than somebody whose income may suggest they’re scaling back instead of scaling up. It is very important that you don’t take time off right before applying for the mortgage, as if your prior 3 months’ earnings are minimal, you will have a very hard time finding someone who’s willing to lend to you.
They will consider how often you tend to work, at what cadence you are paid, how long you’ve been working in the manner that you do, and if you’ve steadily worked for some of the same locums companies or contractors.
Just like underwriting for conventional mortgages, they’ll also take into consideration how much other debt that you have, your credit history and credit score, how much you have in the way of assets and down payment, and the amount of money that you’d like to borrow.
Additionally, they’ll also look at your entity structure (sole prop, LLC, S-corp, etc), if applicable. In general, the more that your entity appears detached from you, the riskier a lender will view lending to you as, and the more insistent they’ll likely be on having a longer track record with 2 years of tax returns.
One thing that can help a self-employed physician is having a spouse with W2 income, even if it’s not as much as they may traditionally want for the size house that you’re buying. Some lenders may ask for a co-signer or recommend applying for the mortgage only under your spouse’s name if they have W2 income.
Lenders may make some additional accommodations if you already have significant assets in savings or other regular income such as from cashflowing real estate investments.
Lastly, some lenders will still put together a lending package for you but may not offer you the 0% down physician loan option you may have seen some of your physician colleagues getting. They may instead require 5 or 10% down, or even more than the conventional 20% down payment for non-physicians. We’ve had some physician members of our communities who do locums report being asked to put down as much as 30%.
As you can see, these are customized underwriting processes and working with a physician mortgage agent who’s willing to be flexible, listen to your situation, and get creative will be key for those who don’t have a 2 year documented history of tax returns demonstrating significant self-employed income.
Conclusion
The bottom line when seeking a mortgage as a 1099 or locums physician is that you do have options, but lenders may have to get creative. If you have a track history of earnings, ideally 2 years, you will likely encounter the fewest challenges, but even if you don’t, shopping around with mortgage agents familiar with physicians that are willing to be flexible will likely yield someone who is willing to offer you a mortgage. Each bank has different nuances and requirements, and you’ll want to find the one that gives you the best lending experience and package. If you are a W2 physician who’s considering making a change, definitely try and purchase your house before making the switch to make the process smoother.