Buying Your First Home: What You Need To Know
Our entire lives we’ve been told when we buy a home, we are living the American Dream. Without a doubt, it’s one of the biggest decisions we make in our adult lives. And yes, it really can be a dream come true when we find the right house for our family.
Many of you reading this have been forced to delay the American Dream. While your friends and family were purchasing their first condos and single-family homes, you were busy working overnight shifts or studying for your medical exams.
You’ve put off your purchase as long as possible, but for whatever personal reasons, now you’re ready to leap into homeownership. I’m going to warn you – it’s an exciting time, but it also comes with a lot of preparation and processes. Today we want to help you dig into the details of what it’s like when you decide to buy a home. We want to show you how to get prepared for one of the biggest purchases in your life.
From knowing when you’re ready to buy a home and the right area to move to, selecting the right agent, and negotiating your offer to purchase. There’s a lot that has to happen on the journey to homeownership, and it starts right here.
How to Know When You Are Ready to Buy a Home
Where are my commitment-phobes out there? If the thought of spending 30 years in any house sends shivers down your spine, then don’t worry. You don’t always have to purchase a home with the thought of “forever” being in your mind. But you do need to know if you’re ready to buy a home.
The first step is to determine how long you think you will be in the area. This may sound pretty simple, but since we can’t see into the future, it can make this question a little more difficult. And for physicians, this question can be even more confusing.
If you’re certain you want to stay in an area for at least a few years, then you can start thinking about putting down roots.
Like it or not, finances are a big part of the equation in determining if you’re ready to buy a home. If you already have issues staying within budget and making your obligations on time with your current salary, then purchasing a home will not help this situation.
Between undergraduate, medical school, and residency, you’re most likely carrying quite a bit of student loan debt. Not to mention any other credit card debt or personal loans you’ve had to take on. These monthly payments have to be factored in, even if the bank doesn’t include them. If you can still meet these obligations and afford to take on a mortgage, then perhaps it’s time to consider buying.
Lastly, you’ll want to analyze the marketplace. Does it seem like the home prices are continuing to rise? Is it possible you will be priced-out of the home-buying market if you continue to wait? These are questions you should ask so you can determine if it’s the right time to buy a home.
Deciding if You Buy a Home or Rent During Residency
The question of whether to buy or rent during residency is one I am asked about frequently, so let’s discuss the pros and cons.
You have to factor in the amount of equity you’ll be able to build, based on the number of years you’ll be in your residency. The length of your residency program is a critical point to consider. It takes a few years to build up a decent amount of equity unless you put in a lot of your own improvements (and let’s be honest, you’re probably not going to have the time during residency).
If you’re 100% certain you do not want to stay where you’ve matched, then don’t add pressure to your life by purchasing a home. There are several fees and costs associated with buying and selling a home. If you know you want to move, it’s wiser to spend the money on something other than selling a home.
You need to be realistic about how much time you can devote to homeownership. If the home is move-in ready, then it might make more sense. However, if you need a ton of repairs and are constantly worried about your air conditioning dying, then you need to re-think the purchase. You won’t be able to give the home the attention it needs when you’re a resident.
The bottom line is, only you can decide if you should buy a home during residency or continue to rent. Whatever you decide, you need to do a lot of research and can’t rush into the decision.
Other Factors to Consider When Buying a Home
Your residency income was probably a quarter of what you have the potential to earn as an attending. So do you wait until you are an attending to consider purchasing? Though your income is higher, you still have the debt you want to pay off. It makes it more difficult to know how much mortgage you can actually afford, and the payment you’re comfortable taking on.
If you utilize a physician mortgage loan, you’ll be able to purchase a home during your residency, even with a large amount of student debt. These loans make it easier than ever for you to consider the option of purchasing during residency, and we’ll discuss this further later on.
Choosing the Right Area to Buy a Home
Knowing when to purchase a home is the first big decision. Once you are ready to start looking, you have to decide where to purchase.
One factor which needs heavy consideration is the school district where your new home will be zoned. If you have kids already, this is probably one of the first things you started researching. But if you don’t have children, buying in a desirable school district will almost always be a sound choice. If you have to sell your home at any point, it’ll make it a lot easier if you’re living in a better school district.
You can expect to pay more for a home to live in an area with better school ratings, but it’s a tradeoff worth making. A good school system not only means quality education for your own child, but it makes your home much more desirable should you decide to sell later.
If at all possible, I encourage you to rent at least 6 months to a year in the area you are considering. By doing this, you’ll get to know the area before you invest hundreds of thousands on a property. It’s a terrible feeling when you’ve spent a ton of money on a house, only to find the location doesn’t work for you.
Choosing a location isn’t limited to the schools either. In addition to the school districts, take a look at the quality of life you’ll have by living in the area. Factor in commute time, walkability, safety, and conveniences which are important for your everyday living. After all, what good is a dream home if you are miserable because you’re living in constant heavy traffic? Not to mention how easy it is for you to get to your office or hospital, especially when you’re on call.
Choosing the right location is a lot of pressure, but this is one area you want to spend time researching. And if at all possible, rent in the area first so you can really get to know how the neighborhood works for you.
Selecting a Real Estate Agent You Can Trust
Chances are, you either know a real estate agent or someone you know is related to one. While there are lots of agents to choose from, it’s not easy knowing which one to choose.
Choosing the right real estate agent for your home search can make or break the home-buying process. A great one will make it run as smoothly as possible. A bad one, well, let’s just say a bad one can make your life a lot harder when you’re trying to buy a home.
Selecting the right real estate agent is one of the key decisions you should make at the beginning of your home search.
One of the most important services an agent can offer to you is to run the comparable home analysis in the area you are purchasing (or in the neighborhood you’re selling your home). This is more than looking online and saying “my neighbor so-and-so was able to sell their home for $400,000.” Looking at comps is very detailed and makes it possible for you to compare apples to apples.
It’s wise to interview agents so you can compare the personalities to one another and confirm the services they will be providing. For instance, some real estate agents specialize in first-time homebuyers. Other agents pour a lot of money into marketing through social media. You also want to choose someone who is very familiar with the area you are targeting.
If you are going to be new to the area, you want to work with an agent who can take the time to explain the neighborhoods to you. This includes the good, the bad, and the ugly. You want someone who will steer you in the right direction.
Tips for Selecting a Real Estate Agent
If you’re moving to an area you’re already familiar with or established in, then start asking your friends in the area who they have used. In addition to asking if they recommend an agent, ask them if there’s anyone they wouldn’t recommend. You’ll start hearing certain names over and over again, and this will help you build an initial list of names.
You could also ask your fee-only financial advisor (if they live in the same city as you) who they’ve used or heard positive feedback regarding. Since your fee-only advisor doesn’t receive any kind of incentive for recommending professionals, this could be a great way to get an objective recommendation.
If you’ve targeted an area you’d like to move to, start driving around and take note of the names of agents you see multiple times. Chances are if you see an agent (or agents) with multiple listings in the same area, then it’s a good indication they know the area.
Questions to Ask a Real Estate Agent
When interviewing the potential agents, don’t be afraid to ask questions about their preferred methods of communication, their marketing plan, and commissions. A good agent will be very open to the answers to your questions.
You also want an agent who will stay on top of the dates and deadlines associated with your contract. It’s important the agent understands your schedule as a physician and how your availability could be limited at certain times. The last thing you want is to miss an important deadline for your contract because your agent isn’t communicating correctly with you.
Some agents will show you lots of statistics about the neighborhood and wow you with their slick marketing materials. Ultimately, pick one who you have confidence will be able to represent you the best in the buying process, and someone who you are comfortable communicating with.
Remember, agents make their commission from the seller of the property you’re purchasing. Agents are paid usually around 5%-6% of the purchase price. The selling agent (the agent representing the seller of the home) has to split this with the buyer’s agent (the agent representing you as the buyer).
Just like an episode on HGTV, the agent needs to ask you what you’re looking for in a home and what are the must-haves and can’t-live-withouts. Don’t be offended when you give the agent your mile-long wish list only for them to tell you what your budget will really be able to purchase. They will know what you can realistically expect within your budget.
Selecting the right agent can make your process of buying a home run as smoothly as possible. A good agent will be there each step of the way, guiding you to make sure you’re getting exactly what you want in your budget.
Determining Your Budget When You Buy a Home
Once you decide the area you want to purchase in and you’ve started interviewing agents, then another critical step in the process is determining your budget.
This is where it can get tough for physicians. Most lenders will look at you as a physician and approve you for the maximum amount your salary could qualify you for. Most lenders will exclude your student loan obligations from your debt since physicians are likely to always be high-earners.
The trouble is, the lender wants you to take on as much as possible. But they won’t be the ones making your monthly mortgage payment. You have to be the one to sit down and determine all of your expenses. You have to include your student loan payments – even if the lender doesn’t think your loans should be considered.
The student loan payments won’t go away until you’ve paid off the entire amount. Of course, you already know this, but for some reason when it comes to qualifying for a home, we tend to let our emotions cloud our judgment.
You want to make sure your new budget for your new mortgage payment still allows room for you to achieve other financial goals you have set for yourself. Make sure you realize the banks are not your friends, and they are not the ones responsible for the mortgage amount due each month.
Stand firm with your budget, even if it means buying a much less expensive home than the one the bank said you were qualified to purchase.
Have Your Emergency Fund Ready
When you buy a home, it’s more important than ever to make sure you have enough emergency funds available to you. I’m pretty sure there’s a Murphy’s Law which states if you don’t have any money in savings then something in your house will break. It’s all but guaranteed.
Being a homeowner means you have full responsibility if something breaks, leaks, cracks, or busts. You can’t call a landlord and demand something to be fixed right away.
Even if you plan on purchasing a home that is move-in ready and in pristine condition, there are always unforeseen expenses that come along with setting up a home. It could be unexpected moving costs or higher utility bills.
Make sure your emergency fund is fully funded (or close to being fully funded) before you decide to purchase your home.
Using Physician Mortgages to Buy a Home
One reason physicians are able to consider purchasing a home while they’re in residency or saddled with student loans is because of the availability of physician mortgage loans. Physician mortgage loans are a unique type of loan – it’s not a conventional mortgage, nor is it one with the lowest interest rate. It’s its own product, and it comes with pros and cons.
Benefits of Physician Mortgages
Physician mortgage loans allow a physician to purchase a home based on their future income. As long as you have a signed contract, then you’re probably good to go. It’s no secret that physicians have a very steady job outlook as well as a salary which will be above the national average. Physicians are considered ideal candidates for loans, especially because of their low rate of default.
In addition to being based on future income, there’s usually a low or no down payment option. One of the best perks of these loans is your debt-to-income ratio (how much debt you have versus the amount of income you bring in) can be factored without some of your student loans. Now, there are caveats to this, but lenders who work with doctor loans are familiar with factoring in medical school loans.
Other Considerations with Physician Mortgage Loans
Where you have to be careful with physician loans is how much you can be qualified to purchase. Don’t be surprised if you’re approved to purchase an amount that will be much higher than what you thought you would be approved to buy. Again, the lenders know you’re a qualified candidate, and they want your business for as long as possible.
Physician mortgage loans tend to have higher interest rates versus conventional mortgages. You will end up paying more for interest over the life of the loan unless you plan to pay it off early or sell your home.
Physician mortgage loans can be instrumental in helping you find a way to homeownership. But they can also lead you down a path of buying a home you can’t truly afford. If you want to make sure you’re not getting in over your head, then you will need to compare several options for mortgages.
One more aspect of physician mortgages which I can personally attest to is the amount of paperwork and the process. It’s more rigorous than what I was initially expecting, but in the end, it was worth the additional effort.
Buying a Home With Conventional Mortgages and PMI
Another loan option to consider, in addition to the physician mortgage loans, is conventional mortgages. Conventional mortgages are the most popular loans provided by lenders, and there are many reasons why they are a popular choice. As a matter of fact, 74% of all the loans issued in 2019 were under the conventional category.
With conventional mortgages, you have a wide variety of terms available to you. You can choose to pay over 10, 15, 20, or 30 years. This has a major impact on your monthly payment, so it allows you to pick a term that fits your monthly budget.
The interest rates for conventional loans are usually very competitive. Typically, your interest rate will drop as your term length is shortened. So you’ll pay less in interest for a 15-year mortgage versus a 30-year option.
Interest rates can either be fixed – meaning they will remain the same over the life of the loan – or it can be variable. The variable interest rates adjust and fluctuate, depending on the market. The number is based on the prime index and can either go up or down.
What sets conventional mortgages apart from almost all loan products is with the down payment. You can qualify for a conventional mortgage with as little as a 3.5% down payment. There are also programs for putting down 5% or 10% too. If you choose to put anything down less than 20%, then you’re going to be responsible for PMI – Private Mortgage Insurance.
PMI is a monthly fee charged by the lender as extra protection in case you default on a loan. This fee is put in place solely to protect the lender.
If you aren’t able to put the 20% down, the lenders put the PMI in place. The lender is essentially charging you an insurance premium to make sure if you stop paying on your loan, they still get paid.
However, as much as it hurts to pay a monthly PMI (which doesn’t enhance your equity or have any benefit to your bottom line) it does allow you the option to transition into homeownership. So while PMI is not ideal – and you should try to put the 20% down to avoid it – it may be the only way to step into homeownership with a conventional loan.
Pre-qualified versus Pre-approved
You will hear a lot of financing jargon as you go through the process of obtaining a loan. One thing which can get confusing pretty quickly is the idea of being pre-qualified versus pre-approved.
They sound the same, but they are quite different. Think of pre-qualifying as the first step of the two. It’s the information you submit to the lender. The lender will then provide an estimate of what you could qualify for if the information you submitted was correct.
Pre-approval is when your information has been verified by the lender. It is the lender’s way of verifying they have reviewed your information and you will qualify for a certain amount based on this information.
Being pre-approved can give you additional negotiation leverage when you make an offer on a home. Having this verification will show the seller that you should be able to complete the financing aspect of the home-buying process.
Making an Offer to Buy a Home
Finding the home is the exciting part. You search and search and then one day you stumble upon “the one.” Or, you luck out and fall in love with the first one you tour. Either way, having a place you’re excited to move into is the motivation you need to move into the next phase.
This is the part where having a very knowledgeable real estate agent will make it worthwhile for you. Making an offer to purchase a home shouldn’t be made lightly. Nor should you feel pressured to buy something right away because others are also looking at the home.
Making an Offer to Purchase
When you make an offer to purchase a home, you need to have your agent review the comparable sales in the neighborhood. The more information your agent can gather, than the stronger your argument can be for your purchase price.
It seems our word and a signed piece of paper is no longer enough when it comes to making an offer to purchase a home. Now when you make an offer, you’re expected to provide a check for earnest money. Earnest money is a good-faith payment made to show the seller you’re serious about purchasing the home.
The check is usually held in a brokerage escrow account – it is never paid directly to the seller. Your real estate agent will advise you on the amount and process for writing a check, based on the market. You can expect the amount to range from 1%-5% of the purchase price, but it can depend on how the market is performing at the time.
Earnest money was put in place to keep people from making multiple offers on multiple properties and then backing out. It offers incentives to both the buyer and seller. It sends a signal to the seller that you are serious about your offer. It allows the seller to re-coupe some of their loss if they took their home off the market but you decided to terminate the contract without cause.
On the other side, the buyer is protected with earnest money because they will get the money back if the contingencies of the contract aren’t met (we’ll discuss contingencies in further detail).
Make sure when you’re evaluating your expenses related to purchasing a home and moving, that you are factoring in the earnest money. If everything works out and you close on your home, it’ll go straight to your closing costs or down payment.
Contingencies are basically a way out for the buyer. You can have several contingencies written into your offer to purchase a home. You’re putting additional requirements into the contract, and if all are met, then the contract will go through as planned.
Common contingencies for buyers include a home inspection contingency, a mortgage or financing contingency, home appraisal contingency, and a contingency to sell your current home first.
It’s very important to have a home inspection performed on the home you’re purchasing. It’s also equally important to make sure you include a home appraisal contingency. This will give you an out in case the home does not approve of the amount which you offer to purchase.
With contingencies, if you remove them from your offer, then your deposit will not be nonrefundable. You’ve essentially removed your “outs” from the contract.
The Home Inspection and Appraisal Process
It took you months, maybe even years to find the home you’re ready to commit to. Then you had a chance to show off your amazing negotiating skills when you made an offer to purchase a home. Now it’s time for the very un-glamorous part of home-ownership which no one gets excited about: going through a home inspection and getting an appraisal.
The Home Inspection Process
When you choose to buy a home, the work is really only beginning once you agree to go under contract. It’s time to have a home inspection performed on your home. The purpose of a home inspection is to reveal any potential problems you couldn’t see when you were touring the home.
A home inspector will check the health of the major systems of the home, plus the basic structural quality.
Not everyone chooses to purchase a home inspection, probably because the $400-$800 price tag scares some people away. But paying this initial amount upfront can literally save you from making a $400,000 mistake (or whatever the price of the home you’re purchasing ends up being). The point is, don’t cut corners with expenses by avoiding a home inspection. You will learn a lot about your house and you can save yourself from being responsible for multiple costly repairs.
When the home inspection is performed, make sure you’re there if possible. Not only will you learn a ton about your potential new home, but the inspector will be able to answer the questions you have on the house.
The Appraisal Process
If you’re financing your home, then you need to have an appraisal performed. The cost for an appraisal can typically be rolled into the closing costs of your new mortgage, so you don’t have to pay for it upfront.
The reason for an appraisal is to determine the fair market value of the home you are purchasing. It’s to make sure the marketplace supports the amount you are offering to pay for the home. This is a necessary step for the lender to ensure they are not lending more money than what the home is actually worth.
The appraisal is meant to be an unbiased review of the home. It doesn’t contain any of the marketing fluff and sales pitches you hear from the homeowners and agents. It’s simply the price the marketplace can bear.
Unlike a home inspection, you don’t have to be present for an appraisal. It’s something your lender will order and will ensure it’s completed. If a home comes back and your offer isn’t consistent with an appraisal, then you’re going to have to decide what to do next. An agent will be able to walk you through all of your options if your appraisal isn’t high enough.
Title Insurance and Wire Fraud
The title to the home you’re purchasing is the way the seller verifies the home is theirs free and clear, and they have the right to sell their home to you.
When you’re buying a home, you possibly need two title insurance policies: one for you as the homebuyer, and one for the lender. The lender’s title insurance is typically included in your closing. But title insurance for you as the homebuyer is optional. Title insurance is something you will want to discuss with your lender. You’ll need to know who’s responsible for paying for which insurance policy.
You will also want to find out the specific instructions related to wiring your funds for the day of closing. There has been an alarming number of cases of wire fraud, where a buyer is emailed from the supposed title company and told to send the deposit to a different email address.
The best thing for you to do is before you wire any money is to confirm the wiring instructions with the office performing your closing. This information will never change. You will not receive any instructions in an email telling you to send it to a different address.
It sounds scary, but it’s something to be aware of as your closing date approaches. As they say, it’s better safe than sorry when it comes to transferring a large amount like a down payment.
Closing on Your New Home
After all the appointments, inspections, questions, and paperwork, the day has finally arrived when you get to close on your new home. Hopefully, the day of closing will involve very little, other than your wrist hurting from signing a ton of paperwork.
Depending on which state you live in, either the title company or a real estate attorney’s office will handle the closing.
If at all possible, schedule your closing for the beginning of the week. This will allow you time to work out any hiccups with your bank or any lingering paperwork. It’ll be much easier to accomplish this on a Monday, versus a Friday afternoon at 4 pm.
Be prepared to sign your life away – ok, not really. But it’ll feel like it at some point. You will be asked to sign the mortgage papers, the title work, the deed, the promissory note, and a ton of disclosures.
Once all the paperwork is signed, then the keys are handed over to you and the home is all yours! The goal which you’ve been working so hard towards is now clearly in sight.
Choosing to Buy a Home is One of Your Biggest Decisions
If you’ve made it to the end of this information, you might be feeling a little overwhelmed. Obviously, buying a home is a huge investment in both time and money. But having a place to call home can be worth the extra effort.
Hopefully, with the information we’ve given you here, you have a better understanding of how much goes into the process to purchase. It’s interesting because almost everyone has to go through all these steps, yet everyone’s experience is different.
When it comes to buying a home, the more information you have upfront, and the more objective you can be as you go through it, the the better off you will be. Don’t worry, you’ll have years to fall in love with your home. But let’s make sure it’s a wise financial decision first, then the love can come later.