Buying a home is a serious life decision for anybody, but in particular for new doctors in residency. During this period of transition for you – this time of reflection and new goal-setting for the next phase in your life and career – you’re probably asking, “Where am I going to live?” and “Should I buy or rent?”
Of course, whether you buy or rent, one thing’s for sure: you will have to pay to live somewhere. Also for sure, wherever that ends up being – and ideally it would be near your hospital of residency – available inventory and will affect what you pay as a buyer or as a renter.
Because home buying is such a major decision, with significant short- and long-term financial considerations, it must be entered into carefully. A fully informed decision is the best kind of decision. You are strongly encouraged to work with a real estate agent, a physician mortgage specialist, and a personal financial planner who are all familiar with the housing market in the area you’re looking to live in.
These professionals should be knowledgeable, good listeners, resourceful and have your best interest in mind as they explore your options with you and advise on your best course of action. Ideally, your Realtor and your financial planner will be familiar with the Doctor Loan Programs available to you and be objective about its benefits, while the physician mortgage specialist will know how best to structure a loan to fit your particular situation.
To that end, let’s briefly look at some advantages to home buying during your residency when using a Doctor Loan Program. Then, you can take what’s here and bring it to the table when you’re ready to talk to the professionals.
The most obvious advantage to home buying is the pride of home ownership. It’s part of the American Dream but also provides you with a major tangible possession. And a Doctor Loan makes it relatively easy to acquire even at this early stage in your medical career.
Furthermore, buying a home is investing in your future net worth. This is true whether you take advantage of a physician loan or not, but imaging making a significant investment in your financial future with the zero-money-down feature of a physician loan. You are building equity with your very first monthly payment. In addition, you are building credit with a home mortgage. You are establishing or strengthening a good foundation of credit worthiness with timely monthly payments on a significant financial responsibility compared to rental payments.
Of course, there is always the risk of a market downturn that negatively impacts the value of your home later on. However, the pride of home ownership and the investment in your financial future – not to mention the control you have over your property versus another owner’s property that you happen to occupy – are potentially worth that risk. Plus, the risk can be minimized with the guidance of a highly knowledgeable local Realtor.
Perhaps the most obvious advantage of using a Doctor Loan to buy your home is that 100% financing benefit. Renting a home usually requires the upfront costs of first month’s rent, last month’s rent, a security deposit, and an application processing fee before you can move in. In contrast, purchasing your home through a physician mortgage requires no out-of-pocket money just to move in. All costs can be built into the mortgage and are covered by your monthly mortgage payments. You can take possession and then make just one monthly payment instead of two months and then some. Avoiding the payout of a large chunk of money all at once can be helpful to you especially at the start of your medical career in residency.
What about upfront costs associated with a home purchase, such as commissions, inspections, appraisals, etc.? The right physician mortgage specialist will structure your loan to allow the home seller to contribute towards closing cost assistance. While it’s true that this could potentially raise the price of the home, even that could turn into a benefit because it potentially raises the value of your home over time. When other homes in the immediate and surrounding neighborhoods later go up for sale, their price point is based in part on the purchase price of neighboring homes, including yours. The higher their price tag, the higher the value of your home.
When your closing costs are a part of the purchase price through a properly structured Doctor Loan, you still have the benefit of 100% financing, and the costs are spread out over the course of your monthly mortgage payments. In other words, you can still move into your new home with $0 out of pocket.
Now, there are other costs associated with home ownership that are not associated with renting. These include predictable and, potentially, unpredictable costs.
Predictable costs include property taxes, loan interest, homeowner’s insurance and, if applicable, HOA (Home Owners Association) fees. However, these don’t have to be additional costs. Your Doctor Loan specialist will work to see if you can qualify for a monthly payment that is all-inclusive of principal and interest, taxes, and insurance, plus any HOA fees.
This points to another advantage of home buying – namely, you can write off the mortgage interest for tax purposes. You can’t write off housing/rental expenses on a home you occupy but don’t own.
Unpredictable costs that would be additional with home ownership are related to house maintenance and repairs. Unlike renting where these costs are generally not the tenant’s but the owner’s responsibility, when the owner is you, it’s you who must pay, whether it be for a leaking faucet or a leaking roof – and everything from top to bottom in between. However, while these costs are inconvenient, their financial impact can be minimized with a thorough home inspection by a professional before you buy.
Another advantage to buying during residency is the potential for paying a lower amount each month as compared to renting. Mortgage payments are based on your income-to-debt ratio, while the rental cost is not. This often results in the rent amount costing more out of pocket per month than a mortgage payment, or at best, the same. Even if they were the same, wouldn’t you rather your hard-earned resident money give you some quantifiable return on investment (building equity and, in turn, your net worth) – especially if it were at a lower cost? Not to mention the tax benefit?
One perceived concern about buying a home is what’s involved if and when you need to sell it, say, if you subsequently had to transfer to a hospital in another city or state. While certainly not as simple as just packing up and moving out once a lease agreement is up, you as a medical resident do have viable options.
For one, as a resident, you most likely won’t have trouble selling your home quickly. Your income probably falls within the range of most Americans so that the demand for, say, a $300,000 house is going to be higher than for a million dollar house. Depending on your area, among home buyers there will be more looking at your house for sale because your salaries will be comparable. Furthermore, demand will be even higher if the home you bought during residency is close to your hospital. That will make your home just as attractive to a new resident as it was to you. A good Realtor who knows the area, the inventory and the level of demand will have their pulse on the local market for you.
Of course, there is still that risk of not being able to sell your home in a timely manner. Another real risk is home values decreasing so that you might have to sell for less than what you originally paid. What you could do instead of sell is rent out your home. This ensures enough income to continue making your mortgage payments on the first home while using your resident’s salary to pay the mortgage on a new home.
In fact, you could start acquiring rental properties – and building multiple equity and your net worth in the process – without paying a dime in out of pocket expenses by way of a Doctor Loan for each new property. (Note: The law prohibits having more than one loan with any bank.)
This is why it is so important to have these conversations with a mortgage lender who knows your area and specializes in Doctor Loan Programs, as well as a savvy financial planner. A good mortgage lender can refer you to one, if needed. It is crucial that you are able to make the most informed decisions.
This article is not intended to discourage you from renting, nor to gloss over what risks there are to buying, during your residency. Rather, it is to clarify what the major considerations are – both the benefits and the risks – and to point you in the direction of talking to experts. When everyone comes together to work as a team, looking at your particular situation and what works best for you, you’ll be in a better position to minimize any potential negative impact from home buying and maximize the benefits of investing in your financial future.