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  • Financial Planning, Home Buying, Loans, Saving, Student Loans

    7 Reasons Why Physicians Shouldn’t Buy a House During Residency

    Model House with keys on a desk. Title: 7 Reasons Why Physicians Shouldn’t Buy a House During Residency

    When you start working as a resident it’s tempting to take the next step and buy a home. After all you’ve graduated from med school, haven’t you also graduated from apartment living to a place of your own? Maybe, but below are 7 reasons why physicians shouldn’t buy a house during residency.

    Residency is a relatively short, busy, and intense period where you continue to learn and develop skills you will hone for the rest of your career. Buying a home during this time can add an additional layer of stress and financial headaches.

    Owning a home is often more costly and time consuming than renting. If you are thinking of buying a home during your residency, read on for 7 reasons you should re-consider your decision.

    1. Residency Only Lasts 3-5 Years, Maybe a Few More With a Fellowship in the Same Place

    The longer you own a home, the greater the chance it will be a good investment. Which is a good reason not to buy a home when you only expect to live in it for 3-5 years.

    When you purchase a home, you can expect to pay 5% of the home’s value in closing costs. Then you can expect to pay roughly 10% in realtor fees and other expenses when you decide to sell. You’re also not building up much equity in the home. During the first few years of your mortgage the vast majority of your payments go towards the interest on the loan, and a tiny amount goes towards the principal.

    U.S. home prices have grown an average of 4.4% per year since 1991. Based on the average growth it’s hard to do much more than break even on a house when you own it for three years. Is that really worth the extra time and effort that comes with owning a home versus renting?

    2. You Don’t Have a Down Payment

    This might not seem like an issue, after all aren’t there special loans specifically designed for young docs that don’t have a down payment saved up? Why yes there are, they are called Physician Mortgage Loans, and while they do exist that doesn’t mean they are the best option.

    Buying a house is a big proposition. Saving up a down payment, even if it is only a small percentage, provides an indication that you are ready for this next step in your financial journey.

    Having a down payment can also protect you on the other side of your home purchase. By putting money down, you already have some equity in your home which can help if the market turns when you need to sell. As discussed above it is hard to break even when you own a house for a short amount of time. Equity provides a cushion when it’s time to sell and your house is worth the same or less than it was when you bought it.

    With a down payment you can choose between more loan options and save on fees like Private Mortgage Insurance (PMI is a lender fee required when you put less than 20% down). You can decide if a lower rate conventional mortgage or if a Physician Mortgage Loan with a slightly higher rate is a better fit. Without cash available for a down payment your options are much more limited.

    3. You Already Have One Mortgage (Student Loan Debt)

    It’s common for med students to graduate with $200k or more of student loans. Managing these loans can already be a stressful situation, before adding an additional mortgage payment to your budget.

    If you have a hefty chunk of student loan debt your available mortgage options are reduced, leaving you with Physician Mortgage Loans as pretty much your only choice.

    4. You Don’t Have Enough Time

    Residency is an extremely important part of your career. During this time is when you are learning, developing, making mistakes and growing within your specialty. All to set you up for success after residency.

    You may enjoy spending your free time in a home that you own, but realistically, how much time will you really have? Rather than spending it on home maintenance tasks, your free time would be better spent resting, recharging, and getting ready for your next shift.

    5. People Underestimate the Time and Costs Associated with Owning a Home

    As a resident you don’t have a ton of free time or extra cash, let alone extra hours to spend mowing a lawn and cleaning out gutters. What about that air conditioner that looks 30 years old and sounds like a rusted jet engine when it starts up? That’s your project to fix or pay to have repaired when it breaks.

    Homeowners can expect to spend between 1% to 4% of their home’s value in maintenance costs each year. These are expenses that you don’t have to worry about when renting. If your toilet breaks and floods your apartment you get to call your landlord to fix it. In your house, you are the one doing the repairs or more likely paying someone else to do it since you don’t have the time as a busy resident.

    6. You Won’t Want Your Residency House as an Attending

    When you finish residency and start receiving your attending paychecks, you’ll probably be ready for a new house. It’s a great idea to “live like a resident” for as long as you can to build a solid financial foundation, and staying with the same home is only possible if you don’t have to move after residency anyway.

    Now that you’re making more as an Attending it can be hard to resist the temptation to keep up with the Joneses. Lifestyle creep can set in, you need extra garage space for your new Tesla, and suddenly your cozy 3-bedroom resident house just doesn’t cut it anymore.

    7. You Can Rent a House

    If you are tired of living in a dorm or apartment, or you absolutely need a house with a yard for your Golden Retriever, you can always rent a house instead. By renting a house you get the benefits of a home without the headaches. It’s easier to budget, there’s less worry about unexpected maintenance costs, and you can move on hassle-free after residency.

    Sometimes buying a house can be the right decision. If you plan to be in the same place for Residency, Fellowship, and as an Attending then it might be the right choice for you. But for most situations the 7 reasons above are why most residents should rent instead.

  • 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.

  • 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.