There’s a right way and a wrong way to do anything that matters, and for many of you, owning a comfortable place that you and your family can call home matters. But this necessity often bears a hefty sticker price. The path you take to purchasing a home can affect your available assets for future investments. So, how do you go about buying, or more precisely, financing a home?
Most people have only two options, but physicians have three.
1. Pay with Cash The downside of paying cash for a home is obvious: many physicians just don’t have the capital. But there’s more to consider here.
Say you’re interested in purchasing your million dollar dream home. Plunking down $1 million in cash will tie up those resources for years, keeping you from investing for retirement or perhaps buying a practice. Paying cash is also a liquidity trap, since the only way to regain access to that cash is to sell or refinance. There’s one more thing to worry about: lawsuits. If you don’t title your home correctly, that equity makes a tasty target for anyone who sues you. Your home equity is a matter of public record in most states.
The advantages of paying in cash are that you’re “done” paying for a home and can feel secure in the decision. Also, it may be easier to close on the home, since you dodge the administrivia that goes with getting a loan.
Paying cash might be a good move if you are near the end of your career and have saved up most of the resources you’ll need for retirement, or if you can’t stomach the thought of investing while being in debt on your house.
2. Go Conventional If the Veteran’s Administration can back it or Fannie Mae can buy it, your home mortgage will bear one of the lowest rates available in the marketplace, which is the big advantage of so-called “conventional” mortgages.
For physicians, though, conventional does not mean convenient. “To get conventional financing, you have to squeeze yourself into a tiny box for the sake of underwriting, which isn’t always a good fit for doctors,” says Josh Mettle, a senior loan officer with Utah Physician Home Loans. Like everything touched by the government, strict guidelines and red tape are the norm, so some physicians—particularly those just out of residency—simply do not qualify.
Perhaps the greatest impediment to purchasing that million dollar home is the down payment. The current limit for conforming loans is $417,000 throughout much of the U.S., and up to $625,500 in pricier markets. Your down payment may run up to $583,000.
Mid-career physicians, those in the more highly-paid specialties and terribly thrifty savers who are stepping up from a less costly home, should consider conventional financing. Everyone else should keep reading.
3. Secure a Doctor Loan Back before we heard the words “new normal,” practically anyone with a pulse and a paycheck could land a seven-figure home with a low down payment and easy approval. Fortunately for physicians, that’s still the case. A special bank-based home loan program known generically as a “doctor loan” uses underwriting criteria that recognizes your earning capacity as a medical practitioner, making it easier to qualify for the loan.
If you’re a newly-minted physician, you may have been denied a loan due to insufficient earnings history. That’s a real pain if you’re trying to buy a new home and start a new job at the same time. Don’t worry, though. Some physician-centric lenders will allow you to close on your home purchase up to 90 days before your first paycheck arrives, basing their underwriting decision on your signed employment contract or offer letter.
Have student loans? Unlike conventional financing, your student loan debt will not count against you when you apply for a doctor loan. This means you’ll go into underwriting with a better debt-to-income ratio and come out qualifying for a bigger home.
How much bigger might that home be? A doctor loan with down payment as low as $50,000 can fetch you a $1 million home, according to Mettle. With decent credit, physicians can borrow up to $400,000 with zero down.
Banks do not sell these loans to the government, which means doctor loans often demand interest rates that can be 0.25 percent to 0.75 percent more than conventional loans, with slightly higher closing costs. There’s a tradeoff here, since doctor loans do not require private mortgage insurance like conventional loans do.
Whether you pay cash, go conventional or secure a doctor loan, a bigger home will have a bigger impact on your ability to invest for retirement, save for college or buy into a practice. Consider your options carefully and consult your financial advisor before you make your final move. The only thing more important than your family’s comfort today is their financial security tomorrow.
W. Ben Utley, CFP®, is the lead advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to save for college and invest for retirement.
Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF, is the founder of Physician Financial Services. Based in New York. He offers income protection and wealth accumulation strategies for physicians nationwide.