Home-buying Decisions for Physicians

Buying a home is extremely important to many people. This decision can be more challenging for physicians, for reasons such as medical school student debt, uncertain living location, medical residency, and other factors specific to physicians.

Let’s break it down into categories:
- Mortgages
- Closing Costs
- Ongoing Maintenance
- Price & Timing
- Physician Loans
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1. Mortgages for Physicians

There are all types of mortgages, but the components that matter are the following:

Interest Rate

This percentage is your cost of borrowing money from the bank. A fixed rate means that cost won’t change over the life of the loan, whereas an adjustable rate will fluctuate in accordance with the interest rate set by the federal reserve.

The Term

The years you have to pay the money back + interest. The two most common terms are 15 and 30 years. Your interest rate will likely be a little bit less if you choose the 15 year rate.

But your monthly payment will be much higher. It is often wise to choose the 30 year mortgage to be able to maximize saving and investing concurrently. Some adjustable rate mortgages have a five-year term where the rate is fixed and then it becomes adjustable after that for the 

The mortgage type

Adjustable rate mortgage, conventional, FHA, and the physician loan are examples. Let’s focus on the conventional versus physician types.

Historically, lenders like it when you make an upfront payment of 20% of the purchase price. 

This is prohibitive for many people including physicians. So with a conventional loan you can likely find a way to only put down 5%, but you will have to pay private mortgage insurance which, in my experience, effectively adds about 0.4% to your interest rate until you have made enough payments that the principal portion of your payments plus your 5% down payment exceeds 20% of your original purchase price. This takes at least 6 years on a 30 year term if you just make the minimum payment. Which is fine. It’s not the end of the world.

The physicians loan allows you to use your status as a physician to sidestep that added charge even if you put down less than 20%. In fact, they often allow you to put down 0%. Bear in mind that fees and interest rates on physicians loans are commonly higher than on conventional loans. The other danger is psychological. Being told you don’t have to put a payment down might compel you to buy a more expensive home than you should purchase.

Let’s move on to the next category.
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2. Closing Costs

Sometimes these costs can be wrapped up in the loan, but don’t count on it. Expect out-of-pocket expenses to be in the vicinity of 3% of the purchase price, so a $500,000 home will come with $15,000 in expenses that you have to pay for in addition to the down payment. These include appraisal fees, environmental analysis, home inspection, attorney fees, title insurance premium, county recording fees, and several other entities waiting for you to pay them. Even if you miraculously negotiate a 0% down loan, you still need savings ready.

Sometimes these costs can be wrapped up in the loan, but don’t count on it. Expect out-of-pocket expenses to be in the vicinity of 3% of the purchase price, so a $500,000 home will come with $15,000 in expenses that you have to pay for in addition to the down payment. These include appraisal fees, environmental analysis, home inspection, attorney fees, title insurance premium, county recording fees, and several other entities waiting for you to pay them.

Even if you have finagled a 0% down loan, you still need savings ready.

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3. Ongoing Maintenance

What it costs to maintain a home varies, sometimes it’s built-in to a homeowners association fee that you were obligated to pay. But if it is a single-family home, you’ll have to budget this for yourself.

Think 2-3% of the purchase price per year.

This cost is one reason I warn trainees about buying a home. Your mortgage payment might be cheaper than renting, but what about maintenance costs? This must be analyzed.

Now let’s get into the last section, the nuances of what price points are appropriate given one’s income.

4. Price and Timing Guidelines

Limiting your mortgage to 2.5x your household income is a start.

Pushing it to 4x your income may be necessary if you’re in a high cost of living area. And even then, housing price increases may make your situation look dire when considering across the board rules like this. So, take it with a grain of salt, understanding that the more you spend on a house, the less you’ll have for other things that you need now and your future-self savings needs.

As far as timing is concerned, I know there are many students and trainees and early-on attendings who strongly desire to buy a home now in spite of their high student loan debt. And no doubt you will hear from attendings who purchased homes as a resident between 2010 and 2017 who will say it was the best decision they ever made. They aren’t wrong and they worked hard to make it a success.

But they are also lucky, have the benefit of hindsight, and most importantly they aren’t YOU.

You must evaluate the pros and cons of buying a home while in school or in training based upon real non-sugarcoated data.
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What information will you need in the lending process?

- Proof of income/physician employment contract

- Proof of funds (savings)

- Evidence of your debt history

- Your credit report (they will pull it but you should know what it says before you start this process.)
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What debt to income ratio should you aim for?

This is the sum of your monthly debt payments divided by your gross income.

Most lenders are looking for a DTI ratio of less than 36%. With a physicians loan, the lender may give special consideration to your student loans.

Aside from the mortgage itself, you’ll have to pay for property taxes and homeowners insurance  forever. Along with utilities, these costs should be determined before you proceed to make an offer. Bear in mind that taxes will often jump up once your new purchase price becomes public record because your town or county bases your property’s taxes on its latest confirmed value.

Physician Loans

As a physician, the dream of owning a home may seem distant due to the burden of student loans and the uncertainty of a stable income. However, physician loans offer a unique solution for medical professionals looking to enter the housing market.

Unlike conventional mortgages, physician loans offer a range of benefits that make the home-buying process more accessible and affordable. One of the main advantages is the reduced down payment requirement, which can range from 0-10%. Additionally, physician loans do not require private mortgage insurance (PMI), even if the borrower makes no down payment. This eliminates the need for hundreds of dollars in extra monthly payments, allowing new doctors to focus on paying off their medical school debt.

Another important aspect to consider is the debt-to-income ratio (DTI). Conventional loans typically require a DTI of 50% or lower, but physician loans are more lenient with these restrictions. Medical school graduates often have a high DTI due to accumulated debt, but physician loans take this into account and are more relaxed with DTI requirements. Credit card debt, car loans, and other expenses are still examined, but lenders understand that a higher DTI is not always a deal breaker for new doctors.

It's important to note that physician loans can only be used to buy or refinance a primary residence, and lenders typically won't allow physician loan borrowers to finance a condo. This means you have to live at the home you're buying or refinancing for the majority of the year and you cannot use a doctor loan to finance a second home or investment property.

How do you qualify for a physician loan?

Eligibility for physician loans varies by lender, but generally, they are available to doctors with D.O degrees and some lenders also offer loan programs for medical professionals such as dentists, orthodontists and veterinarians with D.S, M.D, P.M, and V.M degrees. Lenders also require proof of employment and income, but physician loans are flexible in this regard, and will usually accept a contract of employment to verify a doctor's income if they do not have pay stubs or W-2s that reflect their current position.

Overall, physician loans offer a unique opportunity for medical professionals to achieve their dream of homeownership, despite the financial challenges they may face. With reduced down payment requirements, no PMI, and more relaxed DTI restrictions, physician loans make the home-buying process more accessible and affordable for new doctors.‍