Alright, so you’re working at least 80 hours a week and get four days off a month, woohoo! Doesn’t sound like a whole lot of leverage, does it?
What I want to talk about today is the Physician Mortgage, and why it’s such a great tool, not only to allow flexible purchase of a home, but also to help newly minted MDs have a shot at the American Dream before they become attendings a decade later (again, looking at you, general surgery & IM residents with future fellowships).
What’s a Physician Mortgage and How Does it Work?
There are a few key differences from a Physician Mortgage vs. traditional mortgages. Namely:
- Can have a very high (up to 100%) loan to value ratio. This is the amount borrowed over the cost of the home. If you finance 100% of a purchase, you have the potential for zero down on your home.
- Typically, banks charge borrowers PMI (an additional monthly fee called Private Mortgage Insurance) to protect the bank in case a borrower defaults when the loan to value ratio is above 80%. This is why you often hear of “20% down” when purchasing a home. With a Physician Mortgage, there isn’t any PMI payment, even if you bring less than 20% of the cost of the home to the transaction.
- Borrowers are evaluated based on a number of factors, from credit score to employment, and in particular, what’s their monthly income to debt ratio. Since many residents graduate from medical school with large loans – these loans would normally be considered when determining a borrower’s income to debt ratio. For Physician Mortgages, student debt isn’t typically included in the calculation, making it easier to qualify for a home loan.
That’s the list! In short, a Physician Mortgage allows residents to leverage their future (hopefully high) income and secure a loan for a home mortgage at rates quite similar to a conventional (non-physician) 30 year term loan with little to nothing down. You can use your meager residency income (and high student debt) to get banks to give you a loan with favorable rates – how’s that for a physician benefit?
If you’re curious, the other loan product that’s quite similar to physician mortgages are VA Home Loans – available to those that have served in the armed forces. They’re very similar to physician loans, and they also have good refinance terms – I haven’t found a refinance product for physicians that avoids paying PMI. If you’re a veteran, check out this option as well. The WSJ (paywalled, sorry) recently published an article about VA Loans no longer having loan limits – good for high cost of living areas.
This Sounds Great, How do I Get a Physician Mortgage?
There are a number of banks that offer this specific product – The White Coat Investor has a great resource to find physician mortgage providers in your state. Make sure you shop around and get a few different quotes – it doesn’t take a terribly long time, and getting the lowest interest rate you can will help you save over the life of the loan.
From the experience The Surgeon & The SurgeonSpouse had with the physician mortgage, it worked quite well for helping us to purchase a home. We ended up putting 0% down and keeping our savings in our investment accounts. What I haven’t mentioned but also is critical – what’s the cost of living where your residency is?
I Live in a High Cost of Living Area – Help!
I hate to break it to you, but you might be SOL in this case. There are a number of factors to consider when evaluating whether it makes sense to buy a home while in residency.
- How long is your residency?
- How expensive is your area?
- Do you want to own a home?
The New York Times has a great tool that can help you compare the cost of renting vs. the cost of buying to see which makes the most financial sense. Of course, if you want to buy a house and you’re dead set on it – use the physician mortgage to help you out!
We were fortunate that The Surgeon’s residency is in a relatively affordable market, and could purchase a home within a year of The Surgeon starting her residency. My plan is to live in the house through residency and then ideally rent the home out in fellowship and beyond, turning our first home into an income generating investment.
With Great Power Comes Great (Financial) Responsibility
There are some great benefits at your disposal, like the Physician Mortgage, now that you’re a resident. Before you buy a house, you’ll want to make sure you get your financial house in order. There are a number of great tools that can help you get a holistic view of your financial health. If you have a lot of credit card debt, for example, you’ll likely want to address that first before making the plunge and buying a home, which adds another large monthly outlay to your balance sheet.
Use the physician mortgage to buy a home and build equity while also being able to deploy your funds to other areas with higher potential return – like a retirement account!
Did you buy a house while in residency? How did it go? Drop a note or ask a question in the comments!
-SurgeonJourney