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
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.
Financial Planning
HOW CAN A FINANCIAL ADVISOR HELP
Need a hand with your finances?
Starting out your initial financial decisions are relatively simple. Try to save more than you spend, set aside a sensible amount for emergencies, and invest the rest for longer term goals. As you grow and advance in your career the decisions tend to become more complicated. As you near retirement the decisions become even more important, and delaying major decisions can have huge consequences down the road.
Balancing saving for education and family vacations, choosing between different health and life insurance plans, and managing tax and estate planning issues are just a few of the issues to tackle.
A qualified financial advisor can provide support and guidance as your financial situation becomes more complicated. Building a financial plan, providing answers to challenging financial questions and helping you implement the action steps in your plan are three key ways that a financial advisor can help.
Building Your Financial Plan
One of the top benefits of working with a financial planner is creating a written financial plan. Most of us have a general sense of our goals and what we are doing to achieve them, but taking the time to clearly define and write down what we want and how we will achieve is an extremely worthwhile exercise, but it can be a challenging task to do on your own.
Building a financial plan involves analyzing your financial situation (job, savings, investing, debts) and your goals (family, home, travel, retirement) to create a to-do list to make your goals a reality. The process of creating a written plan helps reduce the anxiety that comes from having a hazy picture of your finances and wondering if you are on track or not. Creating an accurate map of your current situation is the best way to identify the next step on your financial journey.
Answering Challenging Financial Questions
An advisor can provide answers to the questions that often paralyze us into indecision:
- Am I saving enough for retirement?
- Can I afford college tuition for my kids?
- Should I pay off my mortgage early?
- Am I on the right track?
- Can I afford to start a family?
- How do I manage my student loans while still investing?
- How much insurance do I need?
If you have any of these questions or concerns you could benefit from meeting with a qualified financial advisor. During the process of creating a financial plan an advisor can provide guidance and answers to these questions as well as other important life decisions.
Implement the Plan and Adjusting Along the Way
Creating a written financial plan is a great first step that can help you gain a clear understanding of your current situation and the actions you need to take. Just as important, is following through and accomplishing the tasks identified in the plan, as well as making adjustments when things change.
Having regular check-ins with a financial advisor can ensure you remain on track towards your goals. Providing ongoing guidance when new situations pop up such as the birth of another child, an unexpected career move or any of the other things that life might throw your way. An advisor can help you make the necessary adjustments so that these changes don’t derail your plan.
Would you benefit from having professional advice when it comes to planning and achieving your financial goals? A financial advisor can guide you along the path to grow and protect your assets, and secure your future.