At A Glance:
- A physician mortgage loan allows you to borrow money to purchase a house based on your new contract with your employer rather than previous financial statements.
- Each month, along with your mortgage payment, you must pay homeowner’s insurance and property taxes into an escrow account.
- All credit cards should be kept below 50% of the maximum allowed at all times.
Owning a home is a life goal for many people in the Western world. After my graduation as a vitreoretinal surgery fellow, my family and I decided to take the plunge ourselves.
For a first-timer, the house-buying experience is an odyssey. The nomenclature we encounter is not taught in medical school, and the process is not reviewed with an attending (although seeking advice from attendings is always a great idea). Understanding the nuance of tractional retinal detachment repair is no help at all. However, because of my naiveté, I had the opportunity to learn a great deal from this experience.
You won’t find any financial or personal advice in this article, but I will share some of the terms, tips, and tricks I gained from my first-time home-buying experience. This is in no way an all-encompassing list of pointers, but, as with initiating an internal limiting membrane flap, a grasp of small, key steps can help lead to procedural success.
WHAT IS A PHYSICIAN LOAN?
A physician mortgage loan is the scleral buckle of home buying for doctors. It takes time and effort up front, but you are rewarded with stability and long-term support. Physicians are incentivized to borrow money. On average, our salaries include expendable income, and we generally have high job security. However, we also typically leave our training in our 30s with no savings, massive debt, and little credit. Enter the physician loan.
The lending institution is betting on your future earning potential. Usually, a borrower must show previous tax returns and bank statements that exhibit an ability to cover the mortgage. A physician loan, by contrast, allows you to borrow based on your new contract with your practice or institution, rather than on your old financial statements, which are classically embarrassing given the financial conditions of training. Typically, the down payment can be 0% (though not always, and you can lower your monthly payment by putting money down). You are also usually exempt from mortgage insurance (insurance you must pay to protect against defaulting on the loan). Lenders are counting on your job security!
The physician investment advice website White Coat Investor has posted an excellent breakdown and comparison of physician mortgage lenders on a national level.1 Also consider dealing with a local bank, as we did. Hancock Bank was able to offer a competitive rate and personal attention. As a bonus, the conversations we had with our representative at the bank provided much of the information for this article.
As with setting up your OR or clinic schedule, planning ahead leads to an easier process. You typically cannot close on a physician loan more than 59 days before your start date at your new practice or institution. (Bank of America offers 90 days, according to the White Coat Investor.1) The bank wants the security of knowing that you can pay your mortgage, and it also needs to know the amount of your new salary first. Fellows commonly take time off before starting their jobs as attendings, but consider this: If you are starting on August 15 instead of on July 1, your earliest possible closing date will change from May 1 to June 16.
Sellers often do not like extending closing periods, as this puts the seller at risk if you back out. We made our initial deposit nonrefundable after we had inspections performed, in order to secure an extended closing period and to assuage our seller’s fears. If you fall in love with a house in January but you cannot close until July because you have a September start date, the seller may not wait for you.
A jumbo loan means you have crossed a predetermined threshold of borrowing. Your interest will jump excessively if you are borrowing above this amount. When you research homes, find out what constitutes a jumbo loan for your location (higher-cost geographic areas such as California will have higher limits for jumbo loans). Making a larger down payment (money you are not borrowing) can lower your mortgage below the limit.
WHAT IS ESCROW?
Escrow is a holding account, and it should be approached as you would approach research during fellowship: Plan ahead, but don’t be surprised when you have to contribute regularly and find yourself wondering where things are really going. Each month, along with your mortgage payment, you will pay homeowner’s insurance and property taxes into an escrow account. Essentially, the bank doesn’t trust you to save this money for the lump sum needed at the end of each year, so it collects it monthly, places it in an escrow account, and pays the lump sum for you. You will likely need to pay 2 to 3 months’ worth of escrow at the beginning of your mortgage, so be prepared for a higher amount due initially.
HOW MUCH DOES THIS REALLY COST?
There can be hidden peripheral costs in home buying. Don’t just stare at the first large price tag (the price of the house). Keep in mind that you are responsible for all indirect and direct costs associated with buying a house. Indirectly, there’s the cost of taking off work (usually with precious few vacation days during fellowship), flying to your future location, staying in a hotel, and renting a car. Direct costs include inspections, appraisal, closing costs, and more. When you make an offer on a house, you also put down money that can be used for a down payment or closing costs ($5,000 in our case) and pay for inspections (eg, general inspection, pool inspection, wood-destroying organisms inspection) that can range from $100 to $500 or more each. Plan ahead, and know where this money will come from.
CREDIT SCORE CONTEMPLATIONS
Your credibility as a retina surgeon has been built by giving lectures, sending letters to referring physicians, fixing a Friday night retinal detachment for a colleague, and being an overall good doctor and person. Unfortunately, none of this has built your credit score, which affects the interest rate the bank offers you. When you are newly out of training, you likely have not had enough time or made enough significant purchases to build good credit.
It is rare to have a credit score above 740 or 750 before age 35 because of a lack of borrowing history. Your lender knows this, but don’t damage your credit score further by not paying bills or credit cards. One pearl our lender gave us: Keep all credit cards below 50% of the maximum allowed at all times. If your card has a $10,000 limit and you’ve made $6,500 in purchases, your credit score will decrease—even if you pay it off at the end of that month.
RETINA SPECIALISTS: A LENDER’S DREAM
As retina specialists, we spend 8 years building an impressive amount of debt, then another 6 years making close to minimum wage on a per-hour basis. That’s 14 years of accumulating negative or break-even income. On a baseball card, these stats would send you back to the minor leagues. Lenders, however, see us as having all-star potential.
Although our financial past has been unsatisfactory, we have gained knowledge and skills in a secure and stable field. We are ideal candidates to bet on. A physician mortgage loan may or may not be right for you. Buying a house may not even be your best option at this time. But you should know what to expect if you do decide to pursue this portion of the American dream. Happy house hunting!
1. Physician mortgages—What’s available in 2018? The White Coat Investor. March 19, 2018. whitecoatinvestor.com/physician-mortgages/. Accessed May 3, 2018.