Are Physician Loans a Good Idea?
Do you remember when Grey’s Anatomy first went on the air? If you were watching, back in 2005, one of the reasons the show was considered so groundbreaking was because it acknowledged that the life of a physician is not all sweet-smelling roses and giant piles of money.
The show started with a surgeon – a surgeon! – looking for roommates in the home that she didn’t even own. It was owned by her mother, also a surgeon.
Aren’t surgeons among the highest paid specialty? Yup. So why did these surgical residents need roommates in the first place? It’s not as if they would have time to hang out and play board games together.
While being a trained surgeon might be a lucrative career, the job doesn’t start out that way. Being a medical resident of any specialty does not pay terribly well, when compared to the paycheck you’ll receive as a fully trained physician. The national average for residents is $59,300.
Add in the fact that residents must work grueling hours up to twice the national average for other professions and often including shifts that can last more than 24 hours at a time. This is on top of the fact that each physician must excel in a very competitive field. There certainly isn’t any time or energy left over for side gigs.
Sometimes, residents don’t even have time for grocery shopping and proper nutrition. One physician we know spoke of a common adage among residents to survive residency: “Never stand when you could sit. Never sit when you could sleep. See a doughnut, eat a doughnut.”
This is said with a tinge of humor but also sadly rings of the truth. Being a resident is hard. Taking care of one’s basic needs are in the background when learning how to do your new job, especially the type of job where people’s lives are in your hands. This does not leave a lot of room in your days to think about things like home ownership or upkeep on that home.
So, back to those surgeons: even surgical residents need a break when it comes to finances. Physicians may earn high salaries compared to the rest of the country, but that does mean that they are rich. It can cost up to $2.6 million to become a surgeon, when you factor in lost wages, benefits, and medical school.
Then, add in another five to seven years of residency, which is more than the average residency for other fields. That means even more years of not having that high salary, more years of interest accruing in your student loans, and more years when you do not have the time or the energy to look for a place to live or to deal with rent increasing every year when your lease is up.
Is buying a house for me?
With all of that in mind, you might be wondering why to bother adding the stress of buying and owning a house to your life. You might also be asking yourself: are physician loans a good idea? Because, after all, that medical school debt is not going to pay for itself.
Not to worry. In this post, we will break down the details of purchasing a home as a physician to help you learn about your options and help you answer the questions: is buying a home right for me, and are physician loans a good idea?
Buying versus renting
There is a lot of noise online about whether to buy or to rent. You probably know plenty of people in your life with some pretty strong opinions about which is best. The honest answer, from the perspective of a financial advisor, is this: the decision about whether to buy or to rent depends on the market, where you are in your life, and, quite simply, what you decide is best for you.
There is no quiz or magic wand or crystal ball to tell you whether buying or renting is the way to go. There is education, and knowledge, and the opportunity to know your goals and your lifestyle and your numbers. Take advantage of this free blog to learn all about the things to consider when getting your financial house – forgive the pun – in order.
What to consider:
- Maintenance – Do you have the time or the interest in keeping up with regular maintenance of the home? No matter how well you take care of your home, things break and someone needs to make sure they get fixed. Do you want that someone to be you?
- Time in the house – for most people, the general rule of thumb is not to buy unless you know you will be in the home for at least five years. Otherwise you’ll have to pay closing costs for the loan again on the next loan so soon so as not to get any financial value back. In other words, buying and selling houses is expensive because there are fees to be paid. Are you comfortable with accepting that you may not get the value of your closing costs back should you move sooner rather than later?
- Investment potential – where you buy will depend largely on where you match for your residency and where you are hired, or choose to open a practice. Consult a realtor in any area that looks likely for you, and find out what kind of resale, growth, or rental potential might exist should you buy a property and want to rent it out or sell it for a profit later.
- Build your credit rating – owning a home means building your credit, plain and simple. Every month, you’ll not only pay down that mortgage loan, you will build up your FICO score. That is something no rental contract can do for you.
What is a physician loan?
You are in luck: if you decide to buy, you can get to ask yourself this question: are physician loans a good idea? Most people do not have the option of asking themselves that question or benefiting from a type of loan product designed to help you own a home despite larger than average student loan debt.
Upsides of physician loans
Physician loans are what they sound like: loan products tailored for physicians. In order to qualify for you one, you need to be – wait for it – a physician. However, many lenders will offer these loans to other types of doctors as well, such as veterinarians, optometrists, or dentists.
This is because these professions are well paid and in demand, and so make a good risk for lenders to help you borrow a lot of money. The default rate for physicians is very low compared to other professions. Welcome to a financial benefit of this profession you have chosen.
Prime mortgage insurance, aka PMI, is a fee that solely benefits the lender. That’s it. It’s a form of insurance that lenders require of buyers who might not otherwise be prime candidates to borrow that kind of money. Don’t have 20% to put down, the lenders ask? No problem, they say, we’ll still give you the loan, but it will cost you more in the form of this fee, until you have paid enough of the principle so as to have 20% in equity. It gets people in the house, but it’s a more expensive loan.
Houses are expensive enough. Who wants to pay more than they have to?
But what about student loan debt, you ask? Not to worry. Because the default rate for physician loans is so low, lenders look at you through a different lens than other borrowers. In fact, you’re such a good bet financially that lenders will:
- Waive PMI, even if you don’t have 20% of the cost of the house for a down payment
- Require no or a low down payment of less than 20%
- Not factor in student loan debt. That’s right. They treat student loan debt as if it’s invisible when it comes time to qualify for the loan.
- Only require an offer letter to qualify for the loan, even if you haven’t started the job yet
The top three biggest reasons that physician loans are a good idea:
- No PMI, no PMI, and no PMI.
Downsides of physician loans
As great as it is for lenders to see you as the low-risk borrower that you are, the downside of any loan is that lenders will often offer to lend you significantly more money than you need. It can be enticing to see that letter qualifying you for X dollars when you are shopping for something in Y range.
They don’t do this to cheat you or pressure you. They do it because, from an actuarial standpoint, they take a financial risk lending you up that amount of money. You need to do what’s right for you, however. Figure out your budget, and stick with it.
According to Neil Surgenor with TD Bank, the biggest obstacle in buying a home for physicians, especially during or right after residency, is typically coming up with a down payment to buy a home as they have had to deal with the cost of medical schools and often have the burden of student loan debt. This type of debt can also be in issue when calculating debt to income rations on conventional or government-insured loans where physician loans often have accommodations to calculate this debt differently.
Other important details to help you decide if physician loans are a good idea
You do need your offer letter for your residency or position to qualify for the loan. This is not great for medical students, because you won’t have a job yet. To be frank, if you are still in school, you likely can’t qualify for a mortgage, and you really likely can’t qualify for the amount of money at the competitive terms you might be looking for.
If you’re a medical student and are asking yourself, “Are physician loans a good idea,” the answer for you at this stage of your career is probably no. But definitely learn all you can about physician loans, so that you are ready to make a confident decision once you graduate and have that offer letter in hand.
There is generally no cap on the amount borrowed for physician loans. You won’t be able to borrow the moon and the stars for that multi-million dollar mansion you’ve got your eye on – yet. But you should be able to qualify for something pretty reasonable.
Physician loans may also have higher fees than conventional loans in terms of closing costs. That’s often a worthy trade-off for being able to qualify to borrow a healthy amount of money without the lender giving the side-eye to your student loan debt, but is still something you should be aware of.
Always ask your lender for a breakdown of fees. You can also ask for a comparison of fees, interest rates, and qualification amounts for a physician loan versus a regular, conventional loan to see which is better for you.
At the end of the day, if you can afford a 20% down payment on the loan amount you want, you may get a better deal than with a physician loan product. You will avoid PMI due to the amount of your down payment, and if you have that kind of cash handy to put down, you likely have a credit score good enough to qualify for the best interest rates.
Know your numbers
It’s always best to be informed. Make sure you know your numbers:
- Competitive interest rates for the market
- Your FICO score: a score of 700 with some wiggle room between 680 and 750 is generally okay; don’t let a lower score stop you from reaching out to discussing your situation with a lender. You can likely still qualify for a loan at a similar or only slightly more expensive rate.
- Closing costs for a potential physician loan
- Closing costs for a traditional loan
- Debt to income ratio (DTI). Most lenders look for a DTI of 45% or less, not including your student loans. It’s always a good idea to keep debt low, but that ratio specifically means that you should not be using more than 45% of your available credit. That’s right – having more credit cards open than you use is a good thing. The key is to have the credit available but not to use more than 45% of it.
One nice financial aspect of home ownership is that the interest you pay on your mortgage loan every month may be tax deductible. Tax laws can and do change, so check in with your accountant at least once a year at tax season to make sure you are up to date on taking advantage of the deductions available that might help you save money at tax time.
Maintenance and upkeep
Own if you have time for maintenance and upkeep or are prepared to hire someone else to do it. There is little point in purchasing a large investment to call home if you aren’t going to maintain it. Every bit that your home falls into disrepair is like dollar signs floating away from the value of your investment. The lawn needs to be mowed, the heating and cooling system needs maintenance and eventually repair or even replacement. One day that roof is going to need to be replaced, completely. The little things will quickly turn into big things, so be sure not to let maintenance go.
Like with most things in life, there is risk with buying a home. The market could crash and the value of your home could plummet. Maybe you need to move unexpectedly and have this property to deal with. But, historically, real estate has proven to be one of the best risks a person can take. If you’re going to bet on something with taking out loans, there are two bets statistically worth taking: medical school and a home loan.
Once you know your numbers, reach out to a lender who specializes in physician mortgage loans, and get pre-approved to see how much you have available to borrow. Pre-approval is non-binding. You can change your mind and walk away. You can also use that as a time to discuss and negotiate fees in terms of closing costs.
What about stability?
Do you have children? Maybe you need the stability of home ownership for your family. Or, maybe you want a way to keep your monthly expenses steady for the four to seven years that you are in residency. At a minimum, home ownership will allow you to keep your monthly mortgage payment steady, because even if you choose an adjustable rate mortgage, you will be moving before the interest rate has a chance to adjust.
And, back to that Grey’s Anatomy thing. Not everything you see on television is fiction. The idea of pooling resources with roommates is a good one. This way, you benefit from the tax incentives and the equity and the stability of owning your own home, and your roommates help you pay your mortgage and utilities without having to take on a mortgage of their own. This is really not a bad idea, even for physicians.
The most important takeaway is that, as a physician, you have options that will help you get into your first home. When asking yourself, “are physician loans a good idea?” the answer is usually: yes!