Home Buying

Financial Planning, Home Buying, Loans
What is a Physician Mortgage Loan?
Medical professionals, particularly those just starting their careers or with significant student loan debt, often find it challenging to qualify for a traditional mortgage. However, many lenders now offer a physician mortgage loan, which is specifically designed to meet the unique needs of doctors and other medical professionals.
Physician mortgages offer lower down payment requirements, more flexible underwriting guidelines, and higher loan amount limits, making them an attractive option for many physicians. In this article, we’ll explore the details of physician mortgage loans, how they compare to traditional loans, who qualifies for them, and the pros and cons you should take into account when considering this type of mortgage.
Key Points
- A Physician Mortgage Loan can be a great option for medical professionals, especially those at the start of their career, with significant student loan debt, and future income growth.
- Doctors, Dentists, and Veterinarians along with other medical professionals can qualify for a physician mortgage loan.
- Physician mortgages don’t require 20% down payment to avoid PMI and have different underwriting requirements allowing borrowers with hefty student loan debt to qualify.
Details of a Physician Mortgage
A physician mortgage is a home loan specifically designed for doctors and other medical professionals. Unlike traditional mortgages, physician mortgages typically require little or no down payment, which is attractive for physicians who are just starting their careers and may not have a large amount of cash on hand for a down payment. Additionally, physician mortgages may offer more flexible underwriting guidelines, taking into account the significant student loan debt that many medical professionals carry.
One of the most significant benefits of a physician mortgage is that it typically offers a fixed interest rate for the life of the loan. This means that borrowers don’t have to worry about fluctuations in interest rates over time, which can make budgeting and financial planning more comfortable and predictable. Additionally, physician mortgages often have fewer fees and closing costs than traditional mortgages, which can save borrowers a significant amount of money.
Differences between a Physician Mortgage and a Conventional 30-Year Mortgage
The primary difference between a physician mortgage and a conventional 30-year mortgage is the down payment requirement. While conventional mortgages typically require a down payment of 20% or more to avoid paying Private Mortgage Insurance (PMI), physician mortgages often require little or no down payment without a requirement for PMI.
Avoiding PMI is an awesome benefit that can save borrowers hundreds of dollars a month. Banks see borrowers that can’t afford to put down 20% of the house purchase price as “riskier” and require PMI payments as an additional bit of insurance in case of default. Physician Mortgage Loans do away with PMI entirely, allowing you to purchase a house with as little as a $0 down payment.
Another significant difference with physician mortgages is that they may have more flexible underwriting guidelines. One factor lenders consider is your debt to income ratio (DTI), how much your debt payments are as a percentage of your income. This includes car loans, credit card debt, other property loans, and your student loans. Most borrowers have a DTI limit around 40%, meaning that if your total debt payments with the new loan will be above 40% of your gross income you they won’t qualify you for the loan.
This can be a huge hurdle for getting a conventional loan considering the significant student loan debt that many medical professionals carry. Lenders With a physician mortgage the lender may exclude student loans from your DTI ratio allowing you to qualify for a larger loan.
Another feature of physician mortgage loans is they do not have the same limits as conventional loans. With a conforming conventional mortgage the most you can borrow is $726,200 or $1,089,300 in high-cost areas. Physician mortgage loans don’t have this same limit, potentially allowing you to borrow more money for your home purchase.
Just because you can borrow more though doesn’t mean that you necessarily should, you should always take into account the effect on your cashflow when purchasing a home. Staying within or below your means can help you weather future financial emergencies, or take advantage of future opportunities that you might not be able to if you are spending as much as you earn each month.
Differences between a Physician Mortgage and an Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate can change over time, based on market conditions. While ARMs can be attractive for some borrowers who want lower initial monthly payments – and they have seen a surge in popularity lately with the rise in interest rates – they can also be risky, as borrowers don’t know how much their monthly payments will be in the future.
A typical adjustable-rate mortgage is a 5/1 ARM where the mortgage interest rate is set for the first five years of the loan and then changes every year thereafter based on changes in market rates. These can be a good option for a borrower that plans to refinance their mortgage at some point within the fixed portion of the loan, but no one can predict what rates will do in the future and you shouldn’t bank on being able to refinance at a lower rate.
In contrast, physician mortgages offer a fixed interest rate for the life of the loan, providing borrowers with greater financial stability and predictability. Additionally, physician mortgages typically require little or no down payment without mandating the borrower pay PMI, while an ARM has similar requirements as a conventional mortgage when it comes to putting 20% down on the purchase upfront to avoid PMI.
Who Qualifies for a Physician Mortgage?
To qualify for a physician mortgage, borrowers typically need to be medical professionals, which includes doctors, dentists, veterinarians, and other medical professionals. Additionally, lenders will require proof of income, employment, and education, as well as a strong credit score.
Should You Consider a Physician Mortgage?
When considering a physician mortgage as an option, borrowers should consider several factors, including:
1. Interest rates: While physician mortgages often offer a fixed interest rate for the life of the loan, they may have higher interest rates than traditional mortgages due to the lower down payment requirements and more flexible underwriting guidelines.
1. Monthly payments: Because physician mortgages may offer a lower down payment and a higher interest rate, they may require higher monthly payments than a traditional mortgage. Borrowers should ensure that they can comfortably afford their monthly mortgage payments over the life of the loan.
2. Closing costs: While physician mortgages may offer lower closing costs than traditional mortgages, borrowers should still factor in these costs when considering whether a physician mortgage is the right option for them.
3. Future plans: Borrowers should consider their future plans when deciding whether to apply for a physician mortgage. For example, if they plan to move within a few years, a physician mortgage may not be the best option. Because of the low (up to $0) down payment required borrowers do not start out with much if any equity in their home and may not recoup their closing costs and other fees upon selling.
4. Other responsibilities: As a young physician your primary focus will be on growing your career and being successful in your profession. Owning a home brings many additional responsibilities, expenses and distractions. Renting can be a good choice early on in your career, so it’s good to have a clear understanding of your goals when buying a home.
Pros and Cons of a Physician Mortgage
Pros:
1. Lower down payment requirements: Physician mortgages typically require little or no down payment, which can be attractive for physicians who are just starting their careers and may not have a large amount of cash on hand for a down payment.
2. More flexible underwriting guidelines: Physician mortgages may have more flexible underwriting guidelines, taking into account the significant student loan debt that many medical professionals carry.
3. Larger loan limits: Physician mortgages don’t have the same limits as conventional conforming mortgages meaning that you could potentially borrow more than with a traditional mortgage.
4. Fixed interest rates: Physician mortgages typically offer a fixed interest rate for the life of the loan, providing borrowers with greater financial stability and predictability.
Cons:
1. Higher interest rates: Physician mortgages may have higher interest rates than traditional mortgages due to the lower down payment requirements and more flexible underwriting guidelines.
2. Limits on residency types: Some lenders won’t allow you to take out a mortgage loan on a condo or on a second residence, such as a vacation house or rental property.
3. Limited lender options: Physician mortgages may only be available through certain lenders, limiting borrowers’ options.
Wrap Up
Overall, physician mortgages can be an attractive option for medical professionals who are just starting their careers or have significant student loan debt. They offer lower down payment requirements, more flexible underwriting guidelines, fixed interest rates for the life of the loan, and lower closing costs. However, physician mortgages may have higher interest rates than traditional mortgages, and eligibility requirements that limit borrowers’ options. Ultimately, borrowers should carefully consider their financial goals and future plans when deciding whether a physician mortgage is the right option for them.
Home Buying
SHOULD YOU REFINANCE YOUR MORTGAGE?
Mortgage rates have been trending down and the US National average for a 30-year mortgage hit 3.45% last week, a full percentage point lower than where it was the same time last year (4.41%). A lower rate means lower payments. If you bought a house today you’d pay $166 less per month on interest versus a year ago.
But, assuming you already have a home, the drop in interest rates is leading many people to ask themselves if now is the right time to refinance their existing mortgage.
There are many reasons why a homeowner may want to refinance a mortgage, locking in a lower interest rate is only one of them.
Getting a lower payment.
This is typically the biggest driver towards refinancing. By getting a new mortgage at a lower rate you can lower your monthly payment. With this type of refinance you are usually extending the amount of time and interest you will end up paying on your home.
Extracting equity out of your home.
By refinancing you can take advantage of property appreciation and/or your principal payments on your home and cash out some of the equity you’ve built up to use for home improvement projects or other uses.
Reducing interest paid.
Refinancing at a lower interest rate can save you on the total interest paid over the life of the loan.
Refinancing to a shorter loan term.
A shorter loan term can help you save on the total interest paid over the life of the loan albeit with higher monthly payments. Lower interest rates can help bring the monthly payments for a shorter term loan within reach.
Locking in a fixed rate.
Many adjustable rate loan options exist with the interest rate fluctuating over the life of the loan. Locking in at a fixed rate can give you peace of mind that your loan payments will not rise if interest rates do in the future.
The refinancing process can look much like the process you went through when first buying your home and applying for a loan. Your mortgage lender will look at your credit score, income, savings and may ask for a new appraisal of the property. You can expect to pay closing costs on the new loan that can range from 1%-5% of the cost of the loan depending on the lender. Before starting the process, ask yourself a few questions first.
How long do I plan to stay in this current home?
This is a big one. Whether you are living in your forever home or if you plan to move within a few years will have a big effect on refinancing being a good financial decision. A lower monthly payment may seem enticing, but you need to run the numbers to see if you will break even after factoring in the closing costs at the beginning of the loan.
How long do I have left on my current mortgage?
The longer that you pay on a loan the more of your payment goes towards the principal versus interest. In the beginning most of your payment goes to interest and at the end the majority goes towards the principal. If you are closer to the end of your loan there may not be as much of a benefit to getting a lower interest rate. People also derive psychic income from paying off a large debt, so if you are close to having your mortgage paid off you may feel better having it gone rather than extending it and getting a lower payment.
Am I still paying PMI on my loan?
If you have to pay for private mortgage insurance on your loan because you borrowed more than 80% of your home’s value you may be able to get rid of PMI on your new loan by refinancing. You also may be able to stop paying PMI on your current loan if your home has appreciated and/or you’ve built up enough equity in your home. Usually this will require a new appraisal so check with your mortgage lender to be sure.
How much equity do I have in the home?
If you want to get cash out during a refinance then you will need to have the equity in your home to do so. Also, many lenders like you to have at least 80% equity in your home before going forward with a refinance.
What interest rate do I think I will qualify for?
If your financial situation has changed significantly since you applied for your original loan; making more money, paid off debt, increased your credit score. You could qualify for much better loan terms during your refinancing.
Do I have any big financial decisions coming up soon?
Don’t forget to consider any big life decisions you may have coming up. If your job situation is up in the air and you might have the opportunity to take a role that requires a move or more travel, then sitting tight might be the safest decision for now. Or if you thinking of starting a family or a business and your income may fluctuate in the near future, then it may be the right decision to take advantage of your current stability to lock in a new loan now at a lower rate.
Home Buying
IS NOW THE RIGHT TIME TO BUY A HOUSE IN BOISE?
If you’ve been paying attention even a little bit then you know that the housing market in the Treasure Valley has been hot, hot, hot. The median sales price in Boise took a 20% jump this year, even after seven years of already steadily rising prices. This rise is due to the national rebound in home sales, Boise’s status as the fastest growing metro area in the U.S. and local homebuilder’s inability to keep up with demand.
Price increases have cooled off slightly with prices down 4.7% in September (yoy). The Idaho Statesman has a good article with the details and some possible reasons for the slowdown if you are interested. It could be related to rising interest rates, the slowing pace of transplants moving to the area, or something else entirely.
With everything going on in the real estate market you might be asking “Is now the right time to buy?” or “Should I wait for home prices to come down a little more?” or “Will prices shoot back up again next Spring?”.
Should you even try to time the housing market?
If you’ve been waiting for prices to stabilize before dipping a toe in the housing market, then this might be the opportunity you’ve been waiting for.
But, this is probably the wrong question to ask, since trying to time the housing market is just as difficult as timing the stock market. As this great post by Ben Carlson points out, if you are purchasing a house to live in rather than a rental you are probably better off buying when you are ready and can afford to, rather than trying to time a market dip to make your purchase.
So, if “is now the right time to buy?” is the wrong question, then what is the right one?
What question should you be asking?
I would argue that instead of a purely financial decision and trying to time the housing market, the right way to decide whether or not to buy a home is to consider the lifestyle implications and then the financial ones.
Ask yourself: “What is my ideal living situation?”, and once you have that answer, determine if you should rent or buy.
Apartment or condo, urban or suburbs, smaller house with short commute or larger house & yard with a long commute. With the number of decisions that are required when selecting a new home, it’s amazing that anyone moves at all.
When thinking about where to live it’s best to start with what you value most and then choose the option that maximizes those values while fitting within your budget.
A Lifestyle or a Financial Decision?
Do you value living closer to vibrant downtown areas more than you value having a larger yard for your family to enjoy outside? Are you prepared to spend your weekends (or pay someone else) mowing your lawn and cleaning gutters, or would you rather have someone else worry about maintenance issues when they crop up? Do you value the feeling of security with owning or the freedom to move more easily if you get a new job?
When you own a home you:
+ Can plan for fixed payments
+ Build equity as you pay off your mortgage
+ Make changes and remodel the property to your liking
+ Feel more secure and not worry about having to move
– Need to plan for home insurance and property taxes
– Take care of maintenance – lawn care, home repairs
– Could be stuck in a bad situation if the real estate market dips and you need to sell
When you rent a home you:
+ Have to do less maintenance
+ Can move to someplace new with much less hassle
+ Don’t have to worry about additional costs: taxes, insurance, maintenance
– Can’t remodel or customize as much as you might want
– Might have to pay more rent as prices rise
– Could be forced out if a new owner buys the property
When you include the financial aspect of the decision the stakes seem even higher. Remember to not let a potentially favorable financial situation blind you to the aspects involved.
Renting vs buying
The financial comparison of renting vs buying can be more straightforward, and used in conjunction with your values can lead you to the right decision.
The three most important things to consider when comparing renting vs buying from a financial perspective are:
- Housing prices
- Rental Prices
- How long you plan to stay there
If you live in areas where it is cheaper to buy than rent, but you tend to move every 2-3 years, you will probably be better off renting, rather than paying 6% realtor commissions and 1-4% closing costs on every purchase and sale. The New York Times has a great calculator that you can use to compare renting vs buying in your neighborhood. You can enter in the details for your situation: home price, length of stay, mortgage rate, down payment, etc. to see where the rental breakeven point is.
A real life example
I’ll give a personal example from my past for a comparison. When we lived in Cleveland we bought our home for $276,500 in 2012 and sold it for $310,000 in 2015. If we were to rent a house nearby of similar size, our rent would be similar to the mortgage payment we were making.
From a high-level view this looks great, a gain of $33,500 over 3 years. When you subtract the 3% buyer’s realtor fee of $9,300 (we listed the property ourselves so we didn’t have to pay an additional 3% seller’s realtor fee) the gain is down to $24,200.
Not only was this a good period for the real estate market this was also a great time for the stock market. From the time we bought the house in 2012 until we sold it in 2015 the S&P 500 index grew from 1391 to 2066 a gain of 48.6%. We purchased the house with a 5% down payment using a VA loan. If we had instead been able to invest that $13,825 down payment in an S&P index fund we would have made $6,718 over that time, so our original $33,500 gain is now down to $17,481.
During the time we lived there we performed general maintenance on the house and did one large remodeling project adding on to the garage. This project cost us $21,000. So without even adding in the typical maintenance expenses for lawn care, HVAC upkeep, and appliance repairs, what looked like a $33,500 gain is more in the range of a $3,500 loss.
Making the right choice for you
With the benefit of hindsight would we make the same decision to buy rather than rent knowing that it came out as a slight financial benefit to rent? Maybe… if we knew that we would move after three years we probably would have rented, but not knowing that I think we still would have bought our house. We valued some of the things that came with owning the home more than we would have renting. We put in an underground fence for our dogs which we couldn’t do while renting. We painted and redecorated rooms in preparation for the birth of our son which we probably wouldn’t have been able to do if we were renters.
This is a big reason this question is so thorny. The right choice for you can’t be purely boiled down to a numbers only financial decision. The choice of where to live is a lifestyle choice even more than it is a financial one. Knowing this up front can help you make the decision that is right for you.
Home Buying
ARE WE MEANT TO BE HOMEOWNERS?
Lately I have been spending more time on the home browsing site Zillow than I’d care to admit. Especially because we are renting our current home and plan to for another year or so, so we won’t be in the home buying market for a while. But I often find myself drawn back to the site, perusing the houses for sale in our neighborhood. While walking the dogs I tend to take different routes and walk down different streets, partly to break up the routine for the doggos and also to keep tabs on the real estate market in our area. What’s new on the market, what’s sold and those houses that are languishing unsold for some unknown reason.
Most days I will see a few houses for sale and start contemplating what we would change if we bought one.
“Oh, that one looks interesting, we could add a fence and it would be a perfect backyard for the kids and the dogs.”
“Hey, this one has been on the market for almost two months? Maybe there’s something that is scaring people away and we could get a good deal on it.”
I even find myself playing around with a home loan excel spreadsheet, plugging in today’s interest rates and the home prices in our neighborhood to get a feel for what the monthly payments would be.
I’ve been doing this even as we are more than happy renting for the near future and know the prudent financial move, as well as our plan, is to definitely not buy a house yet. We are still getting to know the area after only living here a little over 6 months.
But these feelings, along with conversations I’ve had with my wife have me wondering. Are some of us just meant to be homeowners and others renters, or is something else at play? Maybe I’m letting my feelings get in the way of rational decision making and I need to take a step back and look at the issue from a different vantage point. I know that the sound financial decision for us right now would be to keep renting, so I spent some time really thinking on it to see if I could come up with some possible reasons that I keep being drawn back to those home search sites.
Change is hard
This is the first house we’ve lived in over the past nine years, that we haven’t owned. That’s a pretty big change from the way we’ve been operating. Some of the things about it are great. I don’t feel at all bad about calling the property manager when something breaks so that someone else can come fix it. We haven’t had any major repair issues, like the AC going out, that we’ve had wait a long time for a fix. I know how to lay mortar to re-set tile and replace a leaky toilet, but I was happy enough to have somebody else do it. Along with not having to do the repairs, we also don’t need to budget for them either. Being a renter means you don’t have to pay more than your monthly rent and utilities, and hopefully your kids and dogs puke on the hardwood floors instead of the carpet, that way you get your security deposit back at the end of the lease.
You also have to take the bad that comes with renting along with the good. Since we don’t plan on staying in this house for more than a few years, sometimes it’s hard to make it feel as “homey” as we’d like. I have plenty of friends who were happy to have something other than white walls in their new homes after years of apartment living. We try to hang pictures and decorate to make the house feel like our place as much as possible, but there are lots of little things we’d change to make it feel more like “our place” if we owned it.
Feeling unsettled (or, change is hard part 2)
Along with the change of going from owning a home to renting, is the additional change of moving 2,000 miles away from where we lived before. This has been a big adjustment for us. Getting used to a new place, meeting new people, finding new schools for the kids. It is a lot for anybody to deal with. We love Boise and our neighborhood, and are working on making new friends for us and the kids, but I wonder if subconsciously my mind thinks buying a place will make us feel more settled in and secure here. These feelings will probably fade as we live here longer, but for now I wonder if my mind is trying to cling to something it recognizes as normal with so many new things going on around us.
FOMO
In general house prices have been increasing, and every city and state is different, but here in Boise the real estate market has been on fire. House prices recovered from their recession lows and have been on a tear for the last 4-5 years. Boise is one of the fastest growing cities in the country and new home construction is having a hard time keeping up with the demand. If you talk to anyone in town they will probably tell you that we are near the top in prices, but that they thought the same thing two or three years ago and they’ve only kept going up.
Even with our plans of renting for a year or so, it is easy to get swept along in the frenzy that goes with a hot market. After all, that’s how you get the dot com bubble, or the housing market that lead to the financial crisis in ‘08. When you see prices do nothing but go up it becomes hard to resist joining along with the crowd. I will catch myself thinking, “well maybe we should buy one of these houses now, before the prices go up by another 8% next year”. This is a situation where it is best to have a financial plan to refer to, preferably written down, otherwise we could easily get caught up in the euphoria of the market and make a terrible decision. Our plan is to rent for 1 ½ – 2 years so that we are sure about the area we want to live and don’t end up with a house we need to sell in less than five years. If we made a rash decision and then had to sell a year later, even if the housing market still went up 8-10% we would at best break even after factoring in all the costs that come with buying and selling a home.
We are committed to staying in our rental home for another year, as much as my subconscious might try to get us to leave for something different. We will see what the future holds in the next year. Will we come to enjoy even more the ease of living in a rental and not worrying about home improvements, or will we chafe under the feeling of not being able to change the house to suit our style if it belonged to us? Are we temporary renters, destined to be forever homeowners, or will this experience change us into renters for life?
Either way, letting your emotions take the lead is usually a recommendation for trouble when financial decisions are involved. I’m doing my best to stick to my plan, until some new information comes along that causes me to re-evaluate it.
I’m interested to hear if you have thoughts out there on owning vs renting. Are most people temporary renters, until they can finally buy? We have friends here whose parents have only ever rented, which is very different from our experience where most everyone owns their home. Let me know where you stand, you can send me an email or post in the comments. I’m curious to hear your thoughts.