The Not So Obvious House Poor Example
There are different levels of house poor. Lets say a young physician is starting in practice and wants that million dollar home. Lets see how these numbers shake out.
With a DTI of around 35%, youll qualify from the lenders perspective with lots of room to spare. Youll be left with ~10% of income to furnish the home and bump up your lifestyle a touch above the level you were living in residency. Its unlikely there will be any leftover to save, though, so youd better be prepared to work forever. Your kids wont get any student aid for college because you make too much money. And you arent in a good position to have any leftover money to help them. So they better be prepared to take out large student loans. But youll have a pretty sweet house.
So what about $350,000 income? Is that gonna do the job? If we assume taxes increase to 30% and everything else is the same, youre left with $82,712 per year . That would probably be enough to save for a very average retirement, assuming you were still relatively young. And the rest would allow for a very modest lifestyle increase. It would be very challenging to save for college costs and build up emergency reserves. But it would be possible with discipline.
Essentially, if your home expenses create a situation where youre not able to live your ideal lifestyle, its a form of being house poor.
Alternatives To Physician Mortgage Loans
As tempting as it may be to only focus on the positive features of the physician mortgage loans, its important you understand all of your options before committing. Just because youre a physician, doesnt necessarily mean the doctor mortgage loan is your best, or only option.
Lets consider all the loans which are available to you.
Is A Physician Loan A Conventional Loan
No, a physician mortgage is not considered a conventional loan. The definition of a conventional loan is a loan that is NOT secured by the Federal Housing Administration or Veterans Affairs or the USDA. Because a conventional loan is riskier to the lender, you are required to put down 20%, or pay the PMI.
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How Much Can You Borrow For A Home Loan
You need to have an honest conversation about how much house you can really afford.
Remember, just because youre approved for a certain amount, doesnt mean you should take on the amount you were approved to finance. This is a perfect example of what we refer to as Lifestyle Inflation.
The banks love doctors and they love making money off of you. This means you could easily qualify for a loan which you have no business purchasing.
Since youre not counting your student loans in the DTI, you will be qualified to purchase a home which you may not truly be able to afford.;
Some financial advisors advocate for a 25% rule, others for a 28% rule, but either way, the idea is to divide your take-home pay or net pay by .25 , to get the number that best fits your budget.
As a physician, you have more options for a mortgage loan than most people. You will likely be able to secure a mortgage loan without a down payment, and without paying PMI. These are great benefits! Once you determine a monthly payment where youre comfortable, consider also the length of the loan.
Physician Vs Conventional Loan
If you’ve decided to buy a home, and you are committed to living in an area for more than five years, you should give serious consideration to putting 20% down and getting a conventional mortgage.; The improved monthly cash flow will allow you a great deal of financial freedom and the ability to invest ; You’ll save hundreds of thousands on interest over the life of the loan, all guaranteed, unlike investing a potential down payment elsewhere.; But if, for whatever reason, you’re going to buy a home AND you can’t or don’t want to put 20% down, then a doctor’s loan is a reasonable option and at least as good as the other non-20%-down options.
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Make Sure Youre Ready To Stay Put
The last point you want to consider before purchasing is how much you want to be tied to the area.;
If you have any thoughts of moving after you complete your residency, then youre better off waiting to purchase. Again, its hard to recoup your money if you live in a home less than 5 years.
All these things being said, home ownership definitely has its benefits! Youre in control, you have a place of your own, and you have the potential to make money off the sale one day. But you should never purchase a home unless you go into it with your eyes wide open. Its too expensive to gamble with your finances if youre not ready.
How Much House Can I Afford With A Va Loan
Veterans and active military may qualify for a VA loan, if certain criteria is met. While VA loans require a single upfront funding fee as part of the closing costs, the loan program offers attractive and flexible loan benefits, such as noprivate mortgage insurance premiums and no down payment requirements. VA loan benefits are what make house affordability possible for those who might otherwise not be able to afford a mortgage.
With VA loans, your monthly mortgage payment and recurring monthly debt combined should not exceed 41%. So if you make $3,000 a month , you can afford a house with monthly payments around $1,230 .
Use our VA home loan calculator to estimate how expensive of a house you can afford.
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Characteristics Of Physician Loans
Here are four key ingredients of a physician home loan:
Whats the catch? Physician loans usually have higher interest rates than conventional loans where you put down 20% of the purchase price.
If youre looking for an easy place to compare doctor mortgages all at once, we suggest Credible to see what you could qualify for.
I think were in the seventh inning of an economic boom. Credit underwriting standards reflect that. In 2010 and 2011, getting a mortgage was much more difficult because banks were reeling from the financial crisis. Well see why physician loans right now are offering better terms than they have in many years.
My Experience With A Physician Mortgage
You might be curious as to why Im so passionate about making sure you have a realistic point of view for physician mortgages. Ive personally used a physician mortgage when my wife and I moved our family from Las Vegas to San Diego in 2018.
There were a few major factors in our decision to go the physician mortgage route. The largest reason by far was the ability to put less than 20% down on the new home loan.; Fortunately for us we actually had the 20% down. Unfortunately, it was all tied up in the equity of our home in Las Vegas. We decided we wanted to move without selling our current home, since we had two toddlers and life was about as crazy as possible.
Once we made our big move and sold the house in Vegas, we were able to make a large one-time principal paydown. The physician mortgage option gave us the flexibility to help us during this transition.
We also used the services of Doug Crouse. Youve probably seen his name here on the site or through our podcasts. Hes a good friend to the show but also really knows how to navigate through the physician mortgage process. He helped us lock into a 5% fixed rate on a 30-year loan . He communicated with us through every step and really made it go as smoothly as possible for us.
If you can get your finances organized and work with someone like Doug, then the process for a physician mortgage will be much easier.;
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A Minimum Credit Score Of 680 Is Required
While a perfect is 850, most physician loans require a credit score of only 680 or above. You can use a website such as Credit.com, Credit Sesame, or Credit Karma to get a free estimate of your score; you can also check with your credit card company, since some offer customers free credit scores. If your score is shy of;680, there are steps that you can take to;boost your score, but you should know that it may take several;months for you to increase your score.
My Experience With A Physician Construction Loan
I did nothing but locum tenens work for nearly the first two years after finishing residency. Initially, I used the Gainesville condo as a home base, but I was eventually able to convince my wife to move our belongings out and find a tenant to pay rent.
As a homeless doctor, I knew wed need a place to live when we were ready to settle down in one place. After all, we were expecting our first child in the latter stages of my full-time-locums years.
We had decided to return to a hospital where I had first been a locum. They had been looking for a full-time anesthesiologist, and I would be the department head.
We were told about the strong financials of the place and the fact that they were considering building a surgery center. I might even have an opportunity to invest!
We found a great stretch of vacant waterfront property, and with the help of a 0% APR credit card, I was able to buy the six-figure property with cash.
Did you know you can get a physician loan for construction? Its true! It was arranged at a local bank that I was referred to by the hospitals CEO.
In hindsight, we should have given the appraisers words a bit more consideration.
With the construction loan approved, I was able to build the three story, 4,000 square foot home of our dreams. Our forever home.
A few years after we moved in, the hospital went belly up.
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Do Physician Loans Have Private Mortgage Insurance
If youve done any research so far on mortgages, youve probably come across the PMI acronym. This stands for Private Mortgage Insurance. Its a way for the lender to charge a monthly fee to collect an insurance on you, in case you default on the loan. The thought is if youre putting less than 20% down, then youre a higher risk to loan money to.;
If you think PMI isnt much of anything to worry about, then you may be surprised to hear how much you have to tack on to your mortgage.;
Annual PMI costs are typically between .3% and 1.2% of the mortgage. You will pay this amount until you have paid off 20% of your mortgage. This can take years to reach this point.;
Doctor mortgage loans have the advantage of not having to pay the PMI when a borrower puts down less than 20%. Whereas almost every other kind of mortgage lender requires PMI when the borrower has less than 20% equity in the home.
Longer Time To Build Up Equity
Its hard to deny how attractive the thought of zero down payment can be. This alone can make a physician mortgage loan your preference. But theres a downside to getting into the loan so easily.
You will start off with zero equity in your home.
It will take you a few years to build up a decent amount of equity in your home. Most of us can remember a time when the housing market tanked and millions were left underwater in their home values. Its hard to imagine now, with the housing markets as strong as theyve been, but it wont always be this aggressive.
It makes it harder on you to sell a home when you havent built up equity. If you need as much money as possible from the sale, then its tougher for you to sink money into renovations or staging or realtor fees. By the way, if you need help finding a realtor, we recommend reaching out to Dr. Moves to get connected with a realtor for free.
Whatever the reason for quickly moving is, you do not want to feel trapped in your home by not having any equity.
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Understanding How Much Mortgage You Can Afford
Buying a houseis a huge undertaking, and its easy to get wrapped up in the excitement of it all. Its crucial to be realistic about what you can afford.
You want to hunt for homes that are in your price range so you dont fall in love with a house thats simply out of reach. Knowing your budget and sticking to it will make the entire home buying process run smoothly.;
How To Figure Out How Much House You Can Afford
So, the big question is: how much house can you really afford? There is no quick, short answer to this question. While there are plenty offree online loan calculators that will tell you how much your monthly payment is with different variables, at the end of the day, how much money you are comfortable spending on that roof over your head is up to only one person: you.
To be sure, two people earning the same amount of money, living in the same part of the country, with the same size families, might have two very different thresholds for what they are willing and feel able to spend on housing every month. Thats why its important to look at your financial situation and goals in a big picture way to find the best answer for you as to how much house you can afford to buy.
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Why Physicians Make Great Candidates For Mortgages
When you look at it on paper, it might seem a little curious why banks offer doctors a product like a physician mortgage loan.; When youre a resident making the typical resident salary, you certainly dont look as if you would qualify for a large mortgage. And, when you factor in the large amount of debt and small amount of savings, well, it looks like theres no way you would qualify.
So why the special treatment?
Doctors receive this special treatment because they have a very distinct advantage: An enormous potential to earn money. The average salary of physicians now surpasses $200,000. A strong job outlook for the profession and the earning potential makes them a win-win for lenders.
These lenders also know doctors have opportunities for loan forgiveness through various federal and state programs. Lenders of these types of loans are also very familiar with the different federal medical student loan repayment plans .
Doctors also have lower default rates on loans versus other types of borrowers. There are some estimates that show doctors have a 0.2% default rate, which is much better than average consumers who default at a rate of 1.2%.
The prospect of future opportunities to loan to the physician offers another benefit to the physician mortgage loan lender. Once you develop a relationship with a bank for your mortgage, the likelihood increases of you working with the lender for additional loan products down the road.;
The Doctor Loan: My Experiences Buying And Building With Physician Mortgage Loans
I was finally a doctor. A real doctor. A doctor that could get himself a doctor loan!
The year was 2002 and I had just graduated from medical school. After a one-year internship living in resident housing in La Crosse, WI, a small city famous for having the most bars per capita of anywhere in the U.S., I would be heading to The University of Florida to spend the remaining three years of my anesthesia residency as a Gator Sedator.
Gainesville, a college town and something of a party town in its own right, had no shortage of student housing. But I wasnt a student anymore, I was a doctor, a doctor who would be getting up really early, often working late and sometimes working nights for weeks at a time.
I needed a place of my own. I needed a place of my own in the swankiest building downtown high above the din of the partygoers below. I needed a doctor loan, or a physician mortgage loan, specifically.
Having taken out all of the subsidized loans I qualified for as a medical student, I ended up with a little bit of money leftover, knowing I might need some down payment money, eventually.
As an intern with little time off and incredibly cheap on-campus housing at Gundersen Lutheran hospital in La Crosse, WI, I was able to save a bit more each month in my first year after medical school.
Years later, after selling the place, I no longer have all of the documentation, but I do have a few emails and a decent memory of the details.
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