Doug Crouse and Ryan discuss how doctors can get approved for physician home loans

What You Need To Know About Physician Home Loans

 

Want to know more about physician home loans? You’re in the right place! Doug Crouse, an expert in physician home loans, and I jump into everything you need to know about physician home loans in this next episode. Doug has nearly 2 decades of experience helping physicians obtain financing for their home purchases. Throughout the show, he helps explain the intricacies of physician home loans, FHA loans, VA loans and conventional financing.

We tackle how physicians qualify for physician loans and if doctors should still utilize conventional loans over physician home loans. There are lots of moving pieces when you are starting the process of buying your first home, but after hearing this show you will be able to understand what it takes to get pre-approved for a loan and all the industry terminology used throughout the process. Make sure to check out the show with Mindy Jensen from BiggerPockets for an in-depth look at everything physicians need to know when purchasing a home.

What is a Physician Home Loan?

A physician home loan is a specific loan only available to physicians. Being that this is an attractive option for physicians, here are a few key points to consider:

  • Allow for 0% down payment
  • No private home insurance (known as PMI)
  • Ignore your medical student debt when calculating your debt to income ratio
  • Qualify based on physician’s contracted income (allowing physicians to qualify before you even start working)

What you will learn in this show:

  • How do physicians qualify for the physician home loan?
  • Can you use gifted funds for a down payment?
  • Why choose FSA vs a physician home loan?
  • What is PMI or private home insurance?
  • What you will have to do to qualify for a loan?
  • How much should physicians borrow when purchasing a home?
  • Why physicians should still utilize conventional loans over a physician home loan?
  • What is an adjustable rate home (ARM) and should you choose this type of loan over a fixed rate home?
  • How interest rates are priced and lock-in periods?
  • The difference between prepaid costs and closing costs?
  • Why escrow accounts are used when buying or holding real estate?

Don’t Forget to Add to Your Toolbox, Get Involved and Help. Here’s how:

If you enjoyed this episode, I’m sure you would enjoy reading this: 5 Tips Physicians Need to Know Before Buying a House

Join the Financial Residency Community: Don’t forget to join the Financial Residency Facebook Community for exclusive access to taking the Wealth Potential, Investor Composure and Financial Planning assessments.

Help the Financial Residency podcast reach new listeners on iTunes by leaving a rating and review! It takes just 30 seconds. I really appreciate it, thanks!

Full Transcript: What You Need to Know to Qualify for Physician Home Loans

Ryan

Doug Crouse and I jump into everything you need to know about physician home loans. Doug has nearly 2 decades of experience helping physicians obtain financing for their home purchases and, throughout the show, helps explain the intricacies of physician home loans, FHA loans, VA loans and conventional financing.

We tackle how physicians qualify for physician loans and if doctors should still utilize conventional loans over physician home loans. There are lots of moving pieces when you are starting the process of buying your first home, but after hearing this show you will be able to understand what it takes to get pre-approved for a loan and all the industry terminology used throughout the process. Make sure to check out the show with Mindy Jensen from BiggerPockets for an in-depth look at everything physicians need to know when purchasing a home.

What’s up, everyone? Welcome back. Thank you so much for being here. I know that there’s a lot of things that vie for your attention every day. I appreciate you guys being here every week, spending thirty, forty minutes with me; tackling some of these really important issues to your finances. Today, I have Doug Crouse on the show. Doug and I chat about, literally, everything to do with physician home loans and buying a home…what are physician home loans, how do you qualify, the FSA’s VA loans, conventional loans…everything to do with, basically, financing a home. If you remember way back when, when I talked Mindy Jensen, on episode two of the Financial Residency podcast, on Everything You Don’t Know About Home Ownership; we didn’t really go too much into the physician home loan side of things.

Doug Crouse and Ryan discuss how doctors can get approved for physician home loans

Ryan

We really talked about the actual buying of a home. Doug is the exact opposite. We’re talking a ton about physician home loans and everything that you need to do to prepare to go through underwriting and to qualify for a house. This episode is brought to you by Physician Wealth Services, and for those of you who don’t know, I run a flat-fee only financial planning firm that works exclusively with physicians. I am a fiduciary and I offer financial planning and investment management services for one flat monthly fee. This is pretty unique in the industry. I don’t charge a scaling fee to manage assets, which is referred to as AUM; but everything is included for one flat fee. I practice what I like to call true financial planning. I get to know my clients by having conversations about their goals, what they want to experience, what’s important in their lives, now, and in the future. When we go through the planning process, clients typically gain clarity on what it actually means to them and how they want to live out their lives. What does their ideal life look like? I especially love helping clients that don’t know exactly what they want or haven’t even formulated these goals yet. I work with clients remotely, in an ongoing relationship, and have clients all over the country. I offer a free consultation, to see if we’re a good fit to work together, and you can check out more information on my website at physicianwealthservices.com.

Now, let’s jump into this show with Doug.

Ryan

Alright, Doug. I’m excited to have you on. Thank you so much, again, for being here. I get a lot of questions, working with physicians, about how to apply for loans, what’s going to be requested, and what type of loans are out there. I mean, there’s so much confusion for people who don’t deal with this day-to-day. I’d like to kind of jump in first and just talk about what are the loans types available to physicians specifically, and then also just out there that they could potentially be using, and then we’ll kind of go from there.

Doug

Yeah. Doctors have a unique perspective on this, that they do have a few other options that most people don’t, in that their wives or their male physicians qualify for doctor loans. How those differ, is typically, you have lenders out there that are willing to give a little bit better terms to doctors, because they’re a lower-risk loan. That’s based on the fact that most doctors are able to go out and find another job tomorrow if something happens. So, that tends to make banks want that type of business more so. So, doctor loans, differing from other loans, typically don’t carry home insurance; which makes them very attractive, and up to one hundred percent financing. That’s also not available to the public, other than there’s a specific loan that I’m not really going to get into, but USDA. The main other types of loan that you can get one hundred percent financing is for veterans. I would like to touch on that for just a second. If you’re a doctor and you’re a veteran, then definitely don’t discount the option of doing a VA loan, because often times a VA loan actually would be better terms for you than a doctor loan. They types of loans out there or for options, are going to depend a lot on what you have for credit. FHA has its limits as far as how large of a loan you can get. It’s based on the area that you live in. Like, in Kansas City, for instance, the loan limit here is three hundred and eight thousand. So, that’s going to buy a nice house in Kansas City, but it may not reach the threshold of what some physicians are looking for. Where that’s going to be a standout product, over just a doctor loan, would be people that don’t have perfect credit or seven plus. FHA is kind of a forgiving type of loan that you can have credit scores, actually, even down to five-eighty; where most doctor loans, you’re typically going to see banks wanting you to have at least a seven hundred or even a seven-twenty for some of them.

Ryan

Got you. With the FHA, what is the down payment requirement on that type of loan versus the VA loan that you just mentioned?

You could get gifts from family or a spouse not on physician home loans, but you do have to have three and a half percent down.

Doug

A VA loan, you can literally get into a house with no money at all. I mean, you get one hundred percent financing. You could get between the lender and the seller, to pay all your closing costs and prepaids; whereas, an FHA, you need three and a half percent down. That doesn’t mean that it has to be your three and a half percent. You could get gifts from family or a spouse that’s not on the loan, but you do have to have three and a half percent down. Doctor loans are going to vary lender by lender, but I would say around half of them go to ninety-five percent and require five percent down. A fair number of them are going to offer a hundred percent financing. The ones that do offer five percent down, and this is something that’s changed on conventional financing too, as recent as last year, about a year ago; the five percent can now be gift funds, even on conventional financings. FHA has always been a loan where you could get that down payment as a gift. Now, you can also do that on conventional financing.

Ryan

You’re speaking about the twenty percent down, correct?

Doug

Or, even five percent. So, on a conventional loan, it used to be that you had to have five percent down, and that had to by your funds. Now, if mom and dad want to give you five percent down, you can get into a conventional loan with no money down of your own. You still have to have the five percent, but it doesn’t have to be your money.

Ryan

Yeah, it could be gifted; or you’d season the money before, so you’d have it in your bank account, let’s say in January, and then you don’t apply for a loan until April. They don’t go back more than two statements, right?

Doug

Correct. Yes, they’re looking basically to see that it’s your money or it’s a gift. It can’t be a loan. So, if you’re getting the money from mom and dad, and you have to pay it back, then that can’t be used as your down payment.

Ryan

Yeah, they don’t want anyone to have a better claim than they do on the property that they’re lending. So, as we look at these, let’s talk mainly about FHA versus physician loans; because this is, I think, something that could cause a little confusion. So, with physician loans, let’s just say that it’s one of these five percent down lenders. Why would someone want an FHA loan versus a physician loan or vice versa?

These are the differences between FHA versus physician loans.

Doug

Most of the time, the physician loans are going to have lending limits up to one hundred percent on a lot of lenders to save six hundred, six hundred and fifty thousand. Or, if you get over that six-fifty, up to a million plus, a lot of them will do five percent down; whereas, FHA is, again, driven by your…it’s called an MSA, it’s your market service area. Based on where you’re at, again, Kansas City, it’s three hundred and eight thousand. If you’re talking California, that number might be six hundred thousand, but it’s based on what they consider affordable. It’s a basis of the conforming limits. Where you’re really going to run into…say a physician would want to go FHA versus trying to get a doctor loan, is somebody that doesn’t have a seven hundred credit score. Typically, a physician loan is going to require that, where an FHA, you can get in with a five hundred score or ten percent down. For the three and a half percent financing, you need at least a five-eighty.

Ryan

Yeah. Typically, physicians have higher credit scores, just because they’ve got a pretty good array of credit that’s on time with payments through student debt. So, typically, I see most physicians at seven hundred or above; but that’s a good point to make. I want to make the other point. This has nothing to do with interest rates. This is completely different. So, with interest rates, and respects to those, whether it’s fixed or variable…can you kind of touch on any of that and if there’s differences in FHA and a physician loan.

Doug

Yeah. Typically, a physician loan is going to carry a little bit higher interest rate than even a conforming loan, and it’s because there is no home insurance. I would say ninety percent of them…there are a few lenders that actually have physician loans and then they have home insurance. By not having the home insurance, the lender is taking a higher risk; therefore, they typically want a higher interest rate. FHA is actually just an insured loan by the government. They don’t actually loan the money. They’re just insuring the loan. So, even FHA loans, the rate is negotiable and it’s based on the market. So, FHA tends to be a lower interest rate than conventional financing, but the caveat being that FHA has home insurance for the life of the loan now. So, that makes it considerably more expensive than what it sounds like. So, let’s just say today’s interest rate on a thirty-year fixed conventional is four percent; you might get three and a half on an FHA, but the home insurance is forever, and it’s twice as expensive, if not more, than a conventional home insurance. So, it’s not nearly as good as it sounds on paper whenever you get an interest rate quote on FHA, after you factor in all the numbers.

FHA will allow you to spend fifty-five percent of your gross income; whereas, most doctor loans are going to have a requirement of no more than forty-three percent, some even as low as forty percent.

Ryan

I just want to back up real quick. Can you explain what home insurance is for the listeners?

Doug

Sure. So, whenever a bank makes a loan, a typical loan would be twenty percent down. Then, they have equity in the property. If you don’t make your payment and they have to come foreclose on your house, then they’ve got that cushion; where if you finance one hundred percent, or five percent, down; just the cost of selling the house makes it a risky loan, and the bank stands a lot higher chance of losing money. So, home insurance is typically just a third party that’s sharing in that risk. So, it’s kind of like an insurance premium for the bank. It does nothing for the borrower or the buyer of the house. It’s definitely just for the bank to protect them.

Ryan

That’s a great definition. Thank you. So, let’s jump into kind of qualifying for a loan. I know we’ve touched on FHA needing three and a half, doctor loan or physician loans needing anywhere from zero to five percent down; but, can you kind of talk about debt ratios, reserves, or anything else on those loans that banks would be looking for.

Doug

FHA, different than doctor loans, is a very forgiving loan. Just because you can do this, doesn’t mean that it’s a good idea that you should.

Ryan

Thank you for saying that.

Doug

You know, let’s say you make five thousand dollars a month, a debt ratio of fifty percent means you’re spending twenty-five hundred dollars towards your house payment, your credit card payment, and your car payment. So, FHA will allow you to spend fifty-five percent of your gross income; whereas, most doctor loans are going to have a requirement of no more than forty-three percent, some even as low as forty percent. The doctor loan is going to have a lower threshold of risk there for the lender, but one caveat about the doctor loan that is a real standout, is most lenders will ignore student loan payments if they’re in deferment. So, a lot of doctors, like if you’re coming out of residency, for whatever reason, say you’ve taken a job…like, my wife, she got a job where the employer paid several years in advance of her student loans, so we weren’t responsible for payments on those for, I think, eight years.

Doug Crouse and Ryan discuss how doctors can get approved for physician home loans

The doctor loan is going to have a lower threshold of risk there for the lender, but one caveat about the doctor loan that is a real standout, is most lenders will ignore student loan payments if they’re in deferment.

Ryan

Wow.

Doug

So, on a doctor loan, they’ll ignore those future payments if they’re not going to come due within the next twelve months; where, FHA is going to take those into account and that could easily disqualify you then.

Ryan

We’re talking hundreds of thousands of dollars that they’re just basically saying that doesn’t exist. While I don’t agree with that, that money still comes due and you still have a payment and a responsibility to pay that back; it’s an interesting standpoint that banks take with physicians that they don’t think they’re as risky and don’t count that into the debt-to-income ratios.

Doug

Whenever you start looking at the risk of loans, FHA default rates get into the two, three, four percent range; conventional financing, maybe one to one and a half percent. People get late or completely default. Physician loans, it’s about .4 percent. They’re definitely a low-risk loan for physicians, just based on their history of performance. So, that’s why most banks that do physician loans are willing to give such good terms, because not only are they just low-risk based on history, also physicians as a rule are highly employable. Like I said…my wife, if something happened to her job, I think she could have another job tomorrow. Banks have come to realize that.

Physicians are accustomed to student loan debt. Banks view physician home loans the same way.

Ryan

Yeah, a real steady career choice. I think that’s really fascinating that that’s the stance banks have taken. It does make sense from a high level. Student loans and physicians are accustomed to debt, and while I might not like that too much as a financial planner, they almost become numb to that and know that well, that debt’s there and I need to pay it and this is what I signed on for. So, they view physician home loans the same way and, clearly, with that low of a default rate, banks agree.

Doug

Well, something else to consider too is, not all debt ratios are equal. If you’re somebody that’s making four thousand dollars a month and you have a forty percent debt ratio, then that means you’ve got twenty-four hundred dollars a month left over after you’ve paid your loan and your credit card payments. If you make twenty thousand dollars a month and have a forty percent debt ratio, that means you have twelve thousand dollars a month. So, your discretionary is much higher as your income gets on a larger scale. That also decreases the risk. So, somebody with that higher income, with the same debt ratio, is a lot lower risk than somebody that’s…I call them one water heater away from not being able to buy groceries.

Ryan

Yeah. Hopefully, that’s none of the physicians out there listening to this, but that’s an interesting perspective for sure. Now that we understand it, I do want to highlight one thing. As we’ve been talking about physician loans and FHA, where you need zero to five percent, or three percent, down; that does not mean that the twenty percent conventional that you hear out there…hey, you need twenty percent down to buy a house, doesn’t exist. That is still the best option out there, but if you’re looking to buy a house and you don’t have twenty percent down, these are some other options. Do you want to chat really quick on putting twenty percent down, going through that process, and how that might differ?

Doug

Sure. I mean, I agree with you wholeheartedly. If you can put the money down, avoid paying home insurance; again, you get no benefit from home insurance, it’s strictly for the bank’s benefit. However, depending on where you’re at, you just literally can’t save money fast enough to justify not owning a home. If you’re going to be there twelve months, then that’s a different story; but if you’re planning on being someplace three years, and you can save twenty percent down in the course of three years, the house may have went up thirty percent. It just depends on your markets. It actually costs you more money not to pay that home insurance, in the right environment. Again, that’s going to vary market-by-market. If you’re in Seattle, which we’ve got some DMD’s there, that their market has went up double digits year after year; as opposed to you get into some of the Midwest areas and maybe houses have been pretty stagnant. So, it really varies based on who you are and where you live.

Physician home loans are discretionary based on geography and personal situation.

Ryan

Yeah, that’s a good disclaimer. I always make a point to mention personal finance is personal. What’s good for me, maybe isn’t that great for Doug, which maybe isn’t that great for a physician in Seattle. So, it’s all based on market conditions and what you personally can afford.

Doug

It’s not a one-size-fits-all.

Ryan

There isn’t a one-size-fits-all, and I did want to make that little quick pitch for putting twenty percent down; because I know we’ve chatted here for a few minutes on some low percentage down payment ones. Switching this over to, now we’ve understood the concepts of the loan types available, and we’ve touched on some limits; could we talk about rates for a little bit, and then what an ARM and fixed and that is, and then jump into the closing costs?

Doug

Sure. Again, like I said, doctor loans tend to have a little bit higher rate; because the bank is taking on the extra risk. They want to make a little more money based on that. So, comparing a doctor loan to a twenty percent down, I could tell you from my personal perspective of the loans I could make; a twenty percent down, thirty-year fixed rate, is going to beat a doctor loan seven days a week. So, I definitely agree that if you have the ability to put twenty percent down, you’re going to save money. The interest rates on a physician loan are going to range, you know, it’s again lender-by-lender; but let’s say a thirty-year, fixed-rate physician loan, you’re probably looking at somewhere between four and a half to…I’ve recently got some quotes from some competitors as high as five and three-quarters.

Ryan

Wow.

Doug

Whereas a thirty-year, fixed-rate; the market right now is four percent or a little under, and I’m actually a little below market. So, 3.75 percent on a thirty year. You mentioned ARM’s, and I want to touch on that. Earlier on, say ten years ago, ARM’s were great and they’re going to come back again; but at this point, there’s such a small spread between ARM’s and fixed, there’s very few people that I feel like are going to benefit from the risk of taking an ARM versus a fixed rate, unless it’s somebody that just absolutely knows that they’re going to be there no longer than the length of the term they’re locking. So, there’s products out there where you can get a ten-year ARM, or a seven-year ARM. If there’s no question that you’re going to be moving in that seven or ten years, by all means, look at that; but right now, fixed rate versus ARM’s, there’s just not enough savings to take the future risk, where ten years ago, I was doing three-one ARM’s at two and a half percent, but the fixed rates were five. It absolutely made sense when you were getting an interest rate at half of what the fixed rate was. Currently, a five-one ARM might be a half a percent, or less, cheaper than a thirty-year fixed. So, at that point, it’s just not worth the risk.

Ryan

Yeah, I just want to jump in. So, ARM’s…and I made the mistake of an acronym without explaining it. So, an ARM is an Adjustable Rate Mortgage, for those that don’t know what ARM’s are, we’re not literally talking body parts here. ARM’s were probably some of the reason why we got into that mess in 2007 and 2008. I know that the lending requirements were that you have a pulse, you’re good to go. So, that didn’t help it, but people were able to take these low-cost options with that big spread that you just mentioned.

Banks want doctors to know that they qualify for physician home loans right now.

Doug

Yeah. Today’s ARM’s are qualifying ARM’s. If you have something that’s, say a five-one ARM is a three and a quarter today and it adjusts five years out; that first adjustment is going to be probably a one percent or two percent at the most, where some of those loans that you’re referring to back in 2007 and 2008, they were people that didn’t necessarily have the best credit, and they were getting in on really low rates. Then, when they came due in three or five years, their adjustment might be six percent on that first adjustment. That was just not sustainable. I mean, they were barely able to afford the initial rate. So, that’s something else that you’d always want to look into on an ARM. If you did think that you were going to move, but then you’d need to look at the what-if scenario, that if I don’t happen to move and my ARM does adjust, can I afford it once it does change? The banks are kind of taking a different perspective. They want to know that you can actually qualify for that now, too; as opposed to before, you’re right…if you had a pulse you were going to get a hundred percent financing.

Ryan

Yeah. That’s good that they’re taking that extra step. I mean, they definitely don’t have to, but if you’re looking at ARM’s, make sure that it fits your budget now and into the future. Really quick, I’d like it if you could touch on just how interest rates are priced. You know, when you go through, you know, I’ve heard it before…I’m quoted at this and if we lock in right now, we’ll have a lock for forty-five or ninety days. How does that go behind the scenes? So we can kind of give our listeners a little view in the back here of how you price with interest.

Banks borrow their money from places like Fannie, Freddie, and this other mortgage-loan bank; but, typically, when you’re looking at fixed rates, if you want to know how they’re priced, you just follow a ten-year bond market.

Doug Crouse and Ryan discuss how doctors can get approved for physician home loans

Doug

Banks borrow their money from places like Fannie, Freddie, and this other mortgage-loan bank; but, typically, when you’re looking at fixed rates, if you want to know how they’re priced, you just follow a ten-year bond market. So, they’re always going to be a spread over that. For instance, if you check the ten-year bond…let’s just say it’s two and a quarter, then a thirty-year fixed-rate is probably going to be one and a half to one and three quarters higher than a ten-year cost. So, that’s what banks borrow money…whenever they loan money to consumers, the consumer might be locking in at a thirty-year fixed rate. The bank is borrowing money from the federal government, or securitized by bonds from the federal government, for a ten, fifteen, or possibly longer; but the longer they lock in their rate, the more expensive it is for them to borrow money.

Ryan

Perfect. Before I forget…let’s switch over to the closing costs here; you know, inspections, appraisals, and all that kind of groovy stuff here. Can you jump in and go a little bit more in depth on this here? I think this is really important.

An “ARM” is an Adjustable Rate Mortgage. Make sure it fits your budget now and into the future.

Doug

So, when you buy a house, these doctor loans, some of them have no down payment; but that doesn’t mean that you’re going to move in for no money out of pocket. That’s still a possibility based on if you get lender credits or seller credits, but there’s other monies involved when you buy a house. That’s a couple of items…one is closing costs, and that’s different from prepaid, so I want to explain the difference in those. So, closing costs would be your appraisal, title work. You’ve got loan documents that need recorded at the county, so you have recording feeds, underwriting fees, just actual costs to get a loan. So, if you’re not a cash buyer, these are all required items. Now, if you’re a cash buyer, you’re still going to have what would be considered prepaids, and that would be your pre…well, I guess if you don’t have a loan, you wouldn’t have this, but regardless, you’re still going to have additional items besides the closing costs.

Doug

What makes prepaids different from closing costs are peridium interest. Let’s say you close on a loan today, the bank’s first payment, if today is October 9th, your first payment isn’t going to be due until December 1st. So, you have to pay the bank for the use of their money from the 9th through the 31st. Then, on December 1st, you’re paying part of your payment is the interest for using their money in November. So, prepaids would be those twenty-two days of interest is you closed October 9th through the end of the month. You also have your first year of homeowner’s insurance. That’s going to vary widely based on your credit score and how expensive of a house you’re buying. Let’s just for argument’s sake say that’s two thousand dollars. Closing costs, plus the prepaid interest, plus your first year of homeowner’s insurance; and then you’ve got an escrow account. Most people escrow for taxes and insurance. So, whenever you setup an escrow account, the bank wants to have a reserve so that next year when your bill comes due, they’re going to have enough money to pay your taxes and insurance, and then have a cushion. So, you’re also going to, in addition to paying closing costs and prepaids, that money that goes into your escrow as part of your prepaids would be a couple of months’ cushion of your taxes and insurance. That’s going to vary a lot depending on what time of the year you close and what time of the month you close…whether it’s the first or the end of the month. As a rule, I would say you’re going to run into prepaids in the range of three thousand dollars; and a typical closing cost scenario would be a couple thousand dollars. So, even with a hundred percent financing, you’re still looking at needing around five thousand dollars close.

Ryan

You’re not buying the property with literally zero down. One point that I’d like to make, we talked about it on a previous show, episode two, with Mindy Jensen from Bigger Pockets, about the whole process of buying a home. This is separated out from the earnest money that you have when you put a contract in and have to put earnest money in; this is on top of that. I just wanted to make that point.

Doug

Yeah, earnest money is just going telling the seller that you’re serious about buying their house. It’s basically money that you’re putting down up front. So, that would come off of your closing costs, prepaids, or your down payment at closing. It’s something that you could potentially lose, if you don’t meet your obligations of the contract. So, if you put down five thousand dollars of earnest money, and then cold feet and you don’t have any legitimate reason for not closing on the house, then typically the seller is going to keep that money.

Ryan

That’s because they took the home off the market. They most likely have a loan that they have a loan payment on, and they took the house off the market so that you could do your due diligence; and if you had backed out for no reason, other than I found a better place, then they’re compensated for that. If there’s a legitimate reason, then you can back out or renegotiate with the seller.

Doug

Yeah, and that would happen if you have home inspections and you find serious flaws in the house; or if the house didn’t appraise and you couldn’t negotiate based on that; a new contract price that everybody’s agreeable to. There’s certainly reasons, but that’s stuff you should discuss with your realtor before you just freely open you checkbook and write a large earnest deposit check.

Ryan

Yeah. Great advice there. So, we had already mentioned Fannie and Freddie here. You had mentioned the fed home loan bank. Can you kind of chat on those and how these companies really influence the home lending market?

Companies really influence the physician home loans lending market.

Doug

Sure. So, when banks make loans, obviously, they’ve only got so much to loan. So, how they replenish their money to loan, is they typically loan their deposit-based money and then replenish that by selling that loan to Fannie, Freddie, or the federal home loan bank. Most people wouldn’t realize the difference between them, and there really is very little difference aside from the federal home loan bank. Actually, my bank deals with them more than Fannie, Freddie. It’s exactly like it, it’s just a way for the bank to have liquidity. In selling to the federal home loan bank, we have a specific product where we have shared risks. So, most lenders, when they make a loan, they sell it to Fannie or Freddie and then it’s no longer their loan. So, basically, if three months in, you stop making your payment; then Fannie or Freddie is the one that has that risk. When we sell our loans to the federal home loan bank, we’re more diligent about the loans we make, because we’re still on the hook for it. By doing that, we get better pricing, which ends up reflecting in the rate I’m able to offer.

Ryan

Got you. So, the better pricing is given back to your borrowers as a lower interest rate?

Doug

In the form of either a lower interest rate or, actually, what I do is…my rates are typically on conventional, thirty-year, fixed, lower than my competitors by about a quarter percent. So, I can either offer a quarter percent lower rate than most of my competitors, or if I just match their rate, then I offer a borrower rebate. That’s why I was getting into…either the seller, you can get finance concessions, where the seller can pay certain things for you, but so can the lender. So, typically, most lenders can do this by premium pricing. So, in other words, if I told you that today’s rate was four, then most lenders could say hey, I’ll give you a rate of four and a quarter, but I’ll give you a one percent rebate by taking that. So, if you borrowed three hundred thousand dollars, the lender could offset three thousand of your closing costs. I’m actually able to offer rates of what most of my competitors are offering and give you that one percent rebate; and it’s because we’re retaining the risk on the loan. That offers us better pricing, which we’re just passing back on to the consumer.

Ryan

Got you. So, how rare is it that banks would deal with the fed home loan bank and be able to retain some of that risk versus the typical bank would just sell it off and be done?

Doug

It’s a membership. So, Fannie, Freddie and the federal home…like I said, they’re all similar entities; and banks can join the federal home loan bank. There’s about eight of them across the country, depending on the area that you’re in. Most banks don’t want to retain that risk, because once they sell the loan off, they can go on to their next loan. So, they don’t have to be as careful about the type of loan and the credit that they’re making that decision on. If you look around, I mean, Kansas City, I don’t think I have a single competitor that’s willing to do that. As far as I know, I think Farmer State Bank is the only lender in Kansas City that retains that risk; which in turn offers us better pricing. So, it’s not that they can’t do it, it’s most of them choose not to, because it just leaves that at risk.

Ryan

That’s interesting. I honestly didn’t know that existed until we spoke. That is really fascinating that eight banks across the country can do this. Your bank, as you had mentioned, is one of those. If there’s an ability to get a cheaper loan or reduced interest, or help with closing costs, that’s something that people should be aware of. I really like the ability to help pass the savings down to the consumer, because most of the time you hear the story of they pass the cost down to the consumer and not the savings. So, thank you for explaining that.

And now it’s time for the Curbside Consult.

Ryan

I’ve got two questions for you today, Doug. The first question is, we have a physician looking to buy a house during residency. They have saved up about five percent down and they have two hundred thousand in student debt. They also don’t have a spouse or kids. What choices do they have with respects to their lending and physician home loans?

Doug

You know, with five percent down, you’re going to have several options. I mean, assuming they’re not a veteran…you can only get a VA loan if you’re a veteran. FHA’s are three and half percent down and pretty much every doctor loan out there is going to cover five percent down. Something I will say is, when you’re in residency, there’s a trade-off of buying versus not buying. That first job, a lot of people uproot and move somewhere clear across the country. So, you have to know going into that if it even makes sense to buy a house when you’re in residency. Are you going to be there long enough to make it pay off. Take that two hundred-thousand-dollar house, for example, and let’s just say you’re rent for something comparable is twelve hundred dollars a month; if you could have a payment for that same amount, then probably if you could sell the house for at least what you could paid for it and it’s not a long marketing time, then it makes sense that eighteen months or longer, you’ll actually probably come out better off buying. That’s not always the case. The people that caught in the bubble in 2008, I’m sure there’s plenty of them that really wish they’d had a crystal ball and didn’t buy that house, because then they were stuck with it. If they wanted to move across the country, they just had to turn it into a rental; and maybe they didn’t want to be a landlord. There’s lots of options, but I guess I would caution people in residency to just make sure that it’s…do you plan on staying in the same place you just did your residency? If not, are you going to be there long enough that this makes sense?

Ryan

That’s great advice. My two cents on it would be to make sure that you do some planning here and say do I want to own rental property? If you do, this could be an option. I know people in the military do this all the time, where they switch between bases and they get reassigned; and then they buy a house and all of a sudden you look down and you have five homes in five different places. If you’re comfortable with that idea that when you finish residency in three or four years, that you’re going to move away, you still want to own the home, and this is really a long-term purchase; then that’s definitely part of your financial plan, if you will. If you’re looking at, I’d like to own my own home, but I don’t want to be a long-term landlord or a long-distance landlord, I would really caution against trying to buy something in residency; especially with only five percent down. Doug, I actually do have a question for you related to this. Can someone, if they bought this house using a physician loan, and then moved away, let’s say three years later, and wanted to buy another home, can they get another physician loan?

Doug Crouse and Ryan discuss how doctors can get approved for physician home loans

What happens when a doctor wants to buy another home?

Doug

I would say most banks don’t limit you to the number of physician loans you could have. In other words, a lot of people have that same misconception about FHA. It’s not a first-time homebuyer-only loan. Physician loans typically aren’t, you can have one then done. You can have multiple, but there are definitely lenders that have limitations that say to do a physician loan, you can’t own any other home; and that’s, again, case-by-case based on the lender. Most loan officers would look at that with you and say hey, I’ve got a house here in Kansas City and I’m going to move across the country; does it make sense from an underwriting standpoint? If you’ve got a three-hundred-thousand-dollar house in Kansas City and you’re moving to California; and you’re buying a three-hundred-thousand-dollar house, that looks like your downgrading and buying a rental property. So, it really depends on your circumstances of can I buy another house? The underwriter is just going to look at it as are you cheating the system and using the doctor loan to buy rental property?

Ryan

That’s good perspective to have there. I appreciate that. Yeah, I was curious after I read the question, if you could actually have two; because I haven’t run across that situation yet. The second question I have for you, actually, came from someone who had sent me a message after hearing show number two with Mindy Jensen from Bigger Pockets. It was…we put an offer on a home, it was accepted, everything was going through, we were qualifying for the loan, and all this great stuff; and then the appraisal came back and it was lower than the purchase price. I need to know what are my options available to me knowing that the bank is asking me to put more money in now?

This is what you should know when banks are asking you to put more money in.

Doug

So, from a bank’s perspective, they don’t want to…let’s just simplify the numbers and say you had a hundred-thousand-dollar house and they were going to loan you a hundred thousand dollars; the appraiser comes in and says it’s only worth ninety thousand dollars, then if they loan you a hundred, they’re now at one hundred and eleven percent loan-to-value. Banks typically aren’t going to make anything more than…you know, a hundred percent is already a stretch. They just don’t want to be into the loan for more than they can actually sell the property for.  Typically, in a situation like that, you have three choices. You can either come up with the difference, back to that scenario of a hundred thousand dollars. If it appraises for ninety, then you’d have to bring the ten thousand out-of-pocket. Another option would be to go back to the seller and explain that it appraised for ninety, that’s all it’s worth, that’s all that my bank will loan me; so, we either have to agree to change the transaction to ninety thousand dollars, or I would have to come up with the ten thousand dollars, which I’m not, or not willing to, or capable of doing. Then, the third option would be usually real-estate contracts have an out clause in them, that if the property doesn’t appraise, then that’s a reason that you can cancel the contract. So, if you can’t come to terms with the seller on something that’s agreeable to everybody, then that’s usually a part ways and go find a different house.

Ryan

That’s the appraisal contingency that is on there.

If the market’s telling you a property is worth ninety and you’re trying to buy it at a hundred; go back, renegotiate, and have the seller come down in price.

Doug

Correct.

Ryan

One thing I’d like to add to this is, and this could be right or wrong; but, I look at it as, if the appraisal comes in and…using your example at ninety thousand and you had a purchase price of a hundred, most money in real-estate isn’t made when you sell the house. Most money made on real-estate is when you buy the house. While we’ve kind of taken the assumption that you’re buying your primary residence, I actually looked at this question and was like…from an investment standpoint, you’re probably making the wrong purchase. If the market’s telling you it’s worth ninety and you’re trying to buy it at a hundred; I would definitely go back, renegotiate, and have the seller come down in price; or I would walk. I’ve had clients bring me stuff where a turnkey operator, someone who went and bought a fix-and-flip home; they went in, bought it cheap, renovated it, made it nice and now they’re flipping it out; and that might be what might client was buying. They might offer a turnkey operation where they’ll manage it all this stuff, but I’ve seen this come up where, in our example, they bought it at fifty thousand and put twenty thousand of work into it; they’re in it for seventy, the market says it’s worth ninety, but they’re trying to sell it for a hundred. The bank is going to go no, no, no…that’s too much movement inside of there; and they’re not comfortable going over-appraised for other reasons that Doug had mentioned. I always look at it as, if the appraisal comes in and you’re above that, you’re overpaying. So, I would always try to go back or I’d find another home.

Doug

Yeah. I mean, that’s why you’re hiring the appraiser…to make sure that you’re not overpaying. Who wants to overpay for anything?

Ryan

Exactly. Well, Doug, I really appreciate you coming on today. I think everyone’s going to learn a ton from you. Can you just briefly tell us where they can find out more about you. I know that if they have questions, Doug is going to be in our private Facebook group, Financial Residency VIP Community. Doug will be inside there to answer any questions as well. Doug, where else can they find you?

Doug

You can find me on my website, which is just my name; so, it’s www.dougcrouse.com. I have all my contact information. Feel free to use me as a resource, even if you’ve got another lender and you just want to get a second opinion on something. I definitely don’t mind taking some time to answer and make sure that you’re being treated fairly if you are using someone else.

Ryan

I appreciate Doug. That’s kind of what I do with some of my financial planning stuff as well. It doesn’t hurt to get a second opinion on something. I appreciate you offering that to the listeners. I’ll definitely link to your contact information in the show notes as well.

Doug

Great, Ryan. Thanks for having me.

Ryan

Alright. Well, if you couldn’t tell that Doug and I like nerding out about this stuff; I don’t know what’ll get you there. That was an amazing, fun conversation I had with Doug. Doug, thanks again for being on the show. I really hope that you guys listening took away some key points out there. I know that the physician home loan side of this business is tough. There’s a lot of things that they require. The rules are constantly changing. There’s not a ton of great information out there without someone really trying to pitch you something or sell you something. So, Doug has agreed to be a resource for us continually inside of the Financial Residency Facebook group, and I appreciate that. Doug, like he had mentioned, is married to a physician. We actually met through the Dads Married to Doctors Facebook group and became good friends over the past year. Doug is going to be in the group, the Financial Residency group; and I really encourage you guys to ask him questions, because he is a very great resource. I utilize the back-and-forth discussions with Doug all the time. Next week on the show, we’re going to be talking with Hollie Johnson from Club Thrifty. This show, literally, is dedicated one hundred percent to talking about credit cards; the rewards; what are the best places that you’re looking for, for travel cards and for cashback cards. I’m going to preface this by saying it now…I do not encourage anyone to take out a credit card that they couldn’t afford to pay off that month; and I don’t want you to manufacture spending just to hit these rewards. Like, don’t go off and spend the four thousand dollars a month if you had no plan to do that in the first place, just to get rewards. The best reward that you can have is by not spending the dollar trying to chase that one and a half or two cents that you’ll get back for every dollar. Next week we do have a good show. So, have a great rest of your week and see you guys next time.

 

Ryan Inman