Plan to Buy a Nice Home in a Good Neighborhood
While you were in training, you wanted to buy a new home but you waited and waited.
Now the waiting’s over and it’s time to begin enjoying what you’ve earned.
Make a plan to buy a comfortable home in a safe neighborhood and avoid mistakes along the way.
With a Home Purchase Plan, you can...
Get organized: We help you gather your thoughts and your documents in one place.
Set a realistic goal: Think through the who, what, and when of buying or building a home.
See your options clearly: Understand the pros and cons of your home buying choices.
Know what it takes: Find out how much home you can afford and what the down payment must be.
Find out what to do: Gain step-by-step guidance as you find and finance your new home.
2019 Guide to Physician Mortgages
What is a physician mortgage?
A physician mortgage is a unique type of mortgage loan designed to meet the needs of doctors and medical professionals.
They have fewer restrictions than conventional loans and offer special terms to qualifying physicians.
They are predominantly used by residents and doctors who have just started their practice.
Why do physicians need a special type of mortgage?
Conventional mortgages often don’t work for physicians, especially those in residency or who are just starting in their practice.
New physicians and those still in training rarely have past income or money saved for a down payment.
Their student loan debt often exceeds what many lenders consider an acceptable debt load.
Conventional mortgages limit how much a homeowner can borrow.
Conventional mortgages require income history
Physicians invest substantial amounts of time and money in their training. They start their careers later than most and often graduate with six-figure student loan debt. This makes it challenging to qualify for a conventional mortgage.
Traditional mortgage lenders require a history of income of at least two years. This tells a lender that a borrower has the income necessary to pay their mortgage bill. Physicians, therefore, would have to wait until they’ve established themselves in their practice before they could get a conventional mortgage.
Conventional mortgages require a down payment
Conventional mortgages also typically require a down payment. Lenders want borrowers to invest some of their own money in the property being financed. The most lenient mortgages demand a down payment of 3.5 percent of the purchase price. That equates to a $14,000 down payment for a $400,000 home. A physician who spent years in schools and is still paying student loans and the other expenses of becoming a doctor may not have that much saved.
But what if a borrower was given a gift to help with a down payment? Unfortunately, conventional lenders don’t always allow this. Some do, provided the borrower can prove it’s a gift and not a loan. That means the gift giver can’t expect repayment.
Lenders also typically disallow down payments that originate with another form of debt. Examples include credit card advances, payday loans, or a loan from a retirement account.
Conventional mortgages limit how much you can borrow
Another reason conventional mortgages don’t always work for physicians is they limit how much
Most traditional mortgages are sold by the lender to an entity such as Fannie Mae or Freddie one.
Mac. To meet Fannie and Freddie guidelines, mortgages cannot exceed a certain amount borrowed. In most areas of the country, the limit is $453,100. It’s higher in certain areas of the country where real estate is more expensive.
Physicians who can afford and want to buy expensive homes cannot use a conventional mortgage for financing.
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Why physicians mortgages are often preferred over conventional loans
You won’t pay private mortgage insurance (PMI).
Your student loan debt won’t impact your eligibility.
You don’t need an established income history.
You can use a cash gift for a down payment.
You can buy more house than conventional mortgages allow.
Physician mortgages don’t require PMI
With most conventional loans, you will pay private mortgage insurance unless you can make a down payment of at least 20 percent of the purchase price.
PMI is insurance that protects lenders. In the event a borrower defaults on a mortgage, the lender collects on the PMI policy.
The borrower pays the PMI premium, which is added to the mortgage payment. The cost typically ranges from 1 percent to 1.5 percent of the loan. PMI on a high-end home could add $200 to $300 per month to a mortgage payment.
Physician mortgages almost never include PMI. That’s because physicians are considered low-risk for default.
Physician mortgages treat student loans differently than conventional loans
One of the ways mortgage lenders assess a borrower is analyzing their debt-to-income (DTI) ratio. This measures how much a person’s income goes to pay debts and obligations.
Lenders add up the minimum a borrower pays each month on student loans, credit cards, car loans, child support, alimony, store credit payments and personal loans.
Traditional mortgages limit your DTI to between 35 percent and 40 percent. That means a borrower who earns $10,000 a month cannot have debt payments that exceed $3,500 to $4,000 a month.
Residents and new physicians have significant student debt but may not enough income yet to keep their DTI low enough.
How does a physician mortgage help this problem? They either recalculate the impact of student loan debt or dismiss it altogether. Without a large student loan payment included in the borrower’s debt load, the borrower’s DTI ratio is considerably lower. This makes it easier to qualify for financing. In addition, physician mortgages may accept a DTI as high as 45 percent.
Physician mortgages don’t require an established history of income
Whereas conventional mortgage lenders evaluate borrowers based on income history, physician loans emphasize income potential.
Physicians can close on a new home prior to beginning their employment if they have a contract or offer letter to show the lender.
Self-employed doctors can qualify with six months of income history. Traditional mortgages usually require two year’s worth.
Physician mortgages have flexible down payment options
How much of a down payment a physician needs depends largely on the lender. It may also depend on the size of the loan. In addition, some lenders have different down payment options based on whether the borrower is a practicing physician or resident. Lenders often enable homeowners to use a cash gift to cover the cost of a down payment.
Physician mortgages allow borrowers to buy more expensive homes
Physician mortgages are typically not sold to Fannie Mae or Freddie Mac. Therefore, they are not bound by their borrowing limits. Borrowers who qualify can take out a mortgage worth $1 million, $2 million or even more for their home, depending on the lender’s limits.
How do you qualify for a physician’s mortgage?
Even though they are less restrictive than conventional mortgages, physician loans still have minimum qualifications. They typically include:
A medical school degree
A signed contract or offer letter showing you are employed or about to start your practice
A minimum debt-to-income ratio that does not include student loans
A minimum FICO credit score, which will vary by lender (Typically around 700 to 720)
Lenders may also limit their loans based on:
Area of practice. Lenders may specify that only certain medical designations qualify for their physician loan program.
Experience. Not all lenders will offer physician mortgages to residents. Others do not offer physician mortgages to those who have already been in practice for a certain number of years.
Physician mortgages are available in fixed and adjustable interest rates
A fixed-rate mortgage carries the same interest rate for the life of the loan.
An adjustable rate mortgage (ARM) is one in which the interest rate adjusts over the life of the loan.
A fixed-rate loan offers the advantage of paying the same amount of principal and interest as long as you keep the loan. The rate remains the same whether the loan term is 10, 15, or 30 years.
With an ARM, the lender will adjust the interest rate after an initial fixed period. This period can range from five to 10 years. After the initial period expires, the mortgage rate will adjust each year. It may increase or decrease, depending on the interest rate environment.
One advantage of an ARM is that the interest rate for the initial fixed period is lower than that of a fixed rate mortgage. The shorter the initial fixed period on an ARM, the lower the interest rate.
When should you consider an ARM on your physician mortgage?
You’re buying when rates are high.
You may not live in the home beyond the initial fixed term of the ARM.
You want to pay down your principal each month.
People often avoid ARMs out of concern that they’ll pay a higher interest rate after the initial period expires. But if mortgage rates decline after the initial period, then it’s more advantageous to start out with an ARM.
Another use for an ARM is if the homeowner may sell the house in a few years. If they have short-term plans, there’s little need to have a fixed interest rate for 30 years. With an ARM, they’ll pay less in interest for the years they own the home than if they took out a fixed rate.
Another ARM strategy is to pay down principal faster. This works by determining the principal and interest payment on a 30-year fixed. Then instead of getting the fixed-rate mortgage, the homeowner would finance with an ARM. The lower interest rate will result in a lower monthly payment.
But if the homeowner pays the amount that would be required on a 30-year fixed, the extra money paid will reduce the principal faster.
Should you put zero down or make a down payment?
While other types of mortgages almost always require a down payment, some physician mortgage lenders provide 100 percent financing.
Borrowers who can afford a down payment have to decide whether to use those funds or if it’s better to save their money.
Jonathan Brozek an expert in physician mortgage loans states that even though low down payment options exist for physicians it is best to seek advice from your financial advisor when deciding on choosing to put down between zero and 5%. The down payment you apply towards your new home will have future consequences that can be positive or negative.
The benefits of making a down payment
Lenders are more likely to approve you for a loan if you make a down payment.
The higher your down payment, the lower your interest rate.
You will have more equity in your home.
The disadvantages of making down payment
The main disadvantage of using savings to make a down payment is losing access to your cash.
It’s therefore not available in the event of an emergency.
You can’t invest it in something that may yield a higher rate of return.
You don’t have it for other needs, including the expenses that come with moving and buying a new house.
How down payments affect payments and equity
Consider three hypothetical home buyers:
Physician 1: Buys a $500,000 home with no money down and a 30-year fixed mortgage rate of 5 percent. This physician has a monthly principal and interest payment of $2,684.
Physician 2: Buys a $500,000 home with a 3.5 percent down payment and a 30-year fixed mortgage rate of 4.75 percent. Pays $17,500 down and has a monthly principal and interest payment of $2,517.
Physician 3: Buys a $500,000 home with a 10 percent down payment and a 30-year fixed mortgage rate of 4.5 percent. Pays $50,000 down and has a monthly principal and interest payment of $2,280.
One way to evaluate whether a down payment is the right choice is to consider the break-even point. (A mortgage calculator will help make sense of the numbers.)
Physician 2 spent $17,500 upfront and saved $167 a month on their mortgage payment. It would take just under nine years before the monthly savings add up to $17,500.
Physician 3 spent $50,000 upfront and saved $404 a month. It would take just over 10 years before the monthly savings add up to $50,000.
The amount of the down payments and the difference in monthly payments will make a difference in how quickly a homeowner builds equity.
Equity is the difference between the value of the home and how much is owed on the mortgage. If your home is worth $400,000 and you owe $350,000 on your mortgage, your equity is $50,000.
Jonathan states, the more equity you have, the more you will have in cash when you sell your home. This is especially important if you don’t own the home very long. That’s because in the early years of your mortgage, most of your monthly payment goes toward interest. Your principal does not decrease much.
Imagine the physician homeowners must sell their homes in eight years to take advantage of a new career opportunity. Keep in mind that it typically takes about 10 percent of a home’s sale price to cover real estate agent commissions and other settlement costs when you sell your home.
Physician 1 has a loan balance of $431,678. This means equity of $68,322 plus whatever amount the property has increased in value.
Physician 2 has a loan balance of $411,772. This means equity of $88,228 plus whatever amount the property has increased in value.
Physician 3 has a loan balance of $381,678. This means equity of $118,322 plus whatever amount the property has increased in value.
Physician mortgages can be a valuable tool
Physician mortgages can help those in the medical profession who may not get the best terms from a conventional mortgage. This is especially true for young doctors who are looking to buy their first homes.
2019 Guide to Doctor Mortgage Loans & Buying a First Time Home
Most physicians dream of buying a beautiful home in a safe neighborhood that will house their family for years to come. As first time homebuyers, young doctors often make major mistakes in the home purchase process.
New physicians find themselves in a unique financial situation when they apply for their first mortgage. On the one hand, they have substantial earnings potential. On the other hand, they have little income history, a massive amount of student loan debt, and little to no savings. So how do they buy that perfect home
New physicians, as first time home buyers, face a major financial decision that impacts their ability to reach other financial goals like paying off student loans, saving for college and investing for retirement.
With a new income, a heavy student loan burden and little or no savings, young doctors may have difficulty when applying for a first mortgage.
When Should Physicians Buy Their First Home?
Young doctors, even interns and residents, may be tempted to buy their first home as early as possible. For many new physicians, this leads to one of the greatest financial mistakes they will make. Typically, young doctors have very little money to use as a down payment so they have little or no equity in the home they will buy. This presents no problem when the real estate market and home prices are moving upward, since that means they are making money on the home. However, when home prices decline, all of the equity in the physician’s home may be wiped out, and they may even find themselves with negative equity, known as being “upside down” on the mortgage. If they are forced to sell. a physician family would actually need to bring cash to the closing, effectively having to “write a check” to sell their home.
Generally, physicians are well-advised to buy a home when they are certain they will be in the same city for at least seven years. Often, this means waiting to buy a home until after they have finished residency, finished fellowship and even after making partner with a new practice.
Physician families who are expecting a new baby often rush to buy a home near a good school in hopes that their child will attend there. However, schools change over time and children often have needs that are unexpected, so it may be a better idea to purchase a first home when the first child is nearly ready to enter kindergarten.
While young doctors may find this to be a very long wait, it gives plenty of time to build an emergency fund, pay off debts with higher interest rates and save a larger down payment. Many argue that renting is not a good idea but most fail to remember that the first several years worth of mortgage payments are composed primarily of interest, so little goes toward the loan’s principal.
How Much House Can a Young Doctor Afford?
Young doctors often qualify to buy far more home than they really should. Mortgage lenders consider only a physician’s ability to meet their loan obligations when they do underwriting, so the home loan amount physicians qualify for may be a number that will get them into trouble.
While it is tempting to use a rule of thumb, such as a multiple of income, physician families who are intent on achieving financial security should factor in all of their other goals before they decide how much home to buy.
The home buying decision is one place where the financial planning process is particularly effective for young doctors:
Set financial goals other than housing by thinking about the timing and cost of retirement, college, paying off student loan debt, private school, travel and major purchases.
Calculate the savings needed for all non-housing financial goals and express these as monthly expenses.
Determine costs of living not related to costs of housing.
Determine how the amount of home mortgage payments by starting with the physician family’s gross pre-tax income then deduct amounts for pre-tax retirement savings, income taxes, non-housing debt payments and other non-housing costs of living. The resulting number will be the monthly discretionary income available to pay housing-related costs including principal, interest, property taxes and homeowner’s insurance.
Using the figure calculated above as well as figures related to current mortgage interest rates, determine how much housing debt the physician can assume and service.
Using the mortgage figure, calculate the down payment and arrive at the purchase price for the physician’s first home.
While this process may seem laborious, it will lead physicians to a precise answer to the question, “How much house can I really afford?” and it will put the home purchase decision in its proper context: as one major goal among many important financial goals that lead to financial security.
How Should a New Physician Finance a First Time Home Purchase?
Young medical professionals have several options when it comes to getting a first mortgage, and at least one option—the “doctor loan”—is intended only for them.
Conventional mortgages are for borrowers with an excellent credit score, low debt-to-income ratio and 20% to apply to a down payment. Since the limit on conforming loans is $417,000, the optimal home purchase price for a doctor using conventional financing will be $512,250 (which is a $417,000 loan plus a $104,250 down payment that is 20% of the home price). This financing option is a good fit for young doctors who live in areas with a lower cost of living, those who have received substantial gifts from family, those who have saved diligently and those who want to live in lower-priced homes.
FHA Loans are a good fit for physicians who have less than 20% for a down payment and those who need to borrow more than the conforming limit. FHA loans require the payment of principal mortgage insurance (PMI) of 1.75% of the loan amount up front, plus about 0.5% of the loan amount until the loan to value ratio drops to 80%. It may be possible for physician borrowers to accept a loan with a higher interest rate that factors in the PMI so that the PMI is effectively tax-deductible.
VA Loans are a good fit for military doctors and physicians who served in the military as part of their training. The main benefit of a loan backed by the Veterans Administration is that no down payment is required, so 100% financing is available. Certain limits apply on a county-by-county basis.
“Doctor loan” is a mortgage for physicians in their first ten years of practice, including residents and fellows. While each bank has its own doctor mortgage program, the thing most doctor loans have in common is a low or zero down payment and no principal mortgage insurance (PMI). Some physician home mortgage lenders may charge higher rates for their loans but most will allow borrowers to have larger loan balances than the conforming limits and will accept a written contract as documentation during the underwriting process.
Mortgage Loan Officers Who Offer Doctor Loans
Physician Family does not sell financial products but we can recommend a lender who has experience serving physicians.
Josh Mettle of Fairway Independent Mortgage wrote the book Why Physician Home Loans Fail and offers doctor loans in all 50 states. Contact Josh at (801) 699-4287 or visit https://www.fairwayindependentmc.com/Josh-Mettle.
Evan Estep of Fifth Third Bank offers zero down mortgages of up to $750,000 and 5% down home loans of up to $1 million for physicians without principal mortgage insurance (PMI) with closing on a new home up to 90 days PRIOR to your employment start date in Georgia, Indiana, Illinois, Kentucky, North Carolina, Ohio, Pennsylvania, Tennessee, West virginia and Wisconsin. Contact Evan at (440) 584-4096 or Evan.Estep@53.com.
John Whitener of Mobank Mortgage (a division of Bank of Oklahoma) has over 20 years experience with doctor loans and offers very low down payment options, no mortgage insurance and preferred interest rates. Call John at (800) 230-4627 or visit mobank.com/johnwhitener.
Jonathan Brozek of US Bank offers doctor loans with a low down payment option in all 50 states. Contact Jonathan at (916) 601-8782 or visit Jonathan’s page at US Bank.
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