If you’re a young physician embarking on the path to homeownership, it’s natural to feel a mix of excitement and nervousness. Purchasing your first home is not just a big financial decision but a life-changing milestone that requires careful consideration and planning.
We’ve walked hundreds of young physicians through the process of purchasing a new home, so we understand the distinct challenges and aspirations you face. Among these, is the desire to purchase a home as soon as you begin residency or your attending career. However, this aspiration is often complicated by the burden of student loan payments, increased living expenses, and long-term savings targets.
Let’s explore some practical tips to help you make informed decisions on your way to purchasing a home.
Define Your Priorities & Plan for The Future
Before diving into the housing market, take a moment to reflect on your priorities and your future. If you don’t plan for the future when considering a home purchase, you may end up in an unfavorable situation. Here are a couple questions for you to consider:
- Are you planning to stay at your current job for the foreseeable future, or do you anticipate relocating?
Thinking long-term when purchasing a home will lead to positive outcomes. Consider how your housing needs may evolve over time and whether the home today aligns with your future plans.
For instance, if you’re in residency or in fellowship, purchasing a home might not be the most prudent decision as you might have to move for your first attending job. Unless you’re absolutely certain you will stay in town no matter what, you’re better off planning for a house purchase once you’re settled into an attending position you like.
- Are you planning to start a family soon? Is this home located somewhere that allows your kids to attend your preferred school district?
A house and community that’s perfectly suitable for a young physician or couple might suddenly become undesirable once kids are in the picture. The local community might not be super “kid-friendly” with nearby parks and other young families. In addition, the local school district might not be your ideal choice. And while there’s nothing wrong with getting a starter home before you start a family, it would be best if you could live in that starter home for at least five years before moving to a new house in a more kid-friendly neighborhood. Financially speaking, that is.
Consider ALL costs associated with homeownership
As a physician, your work is in high demand and can offer a well-paid career. But don’t go and blow it all on a big expensive house.
There are many more costs associated with homeownership, than there is with renting, such as monthly mortgage payment, property taxes, insurance, and maintenance expenses. To maintain a financially affordable home, physicians should aim to keep total housing costs within 25-30% of monthly income. For example, if your monthly take home pay is $14,000, it’d be beneficial to keep your monthly payments at $4,200 or less.
One significant distinction between renting and owning a home is that, with ownership, the responsibility for home maintenance and upkeep falls squarely on your shoulders. That means if the tree in your backyard falls and knocks out a fence, you have to take care of the tree removal and fence rebuild. A rule of thumb is to set aside 1%-4% of your home’s value, each year, for home maintenance expenses.
Even as a physician earning north of $250k, it remains essential to budget wisely with your home purchase. Without an understanding of your current expenses and the total costs associated with homeownership, you can end up being house poor. This is where you end up owning a home that leaves you with limited financial flexibility or requires you to “work extra” to make ends meet. You don’t want to be house poor!
Understand Mortgage Options
Explore different mortgage options to find which mortgage will be best for you. While a conventional 30-year fixed-rate mortgage is a popular choice and what most people traditionally go with, you can consider alternatives such as a VA Loan, Physician Loans, or FHA Loans.
Physician Loans are unique as they won’t require Private Mortgage Insurance (PMI) which is typical for other mortgage loans if you put less than 20% down. Also, your proof of income can be a signed employment contract (helpful when you’re finishing training), and you don’t have to come up with a large downpayment. However, this possibly comes with an added cost of higher interest rates.
Conventional mortgages are going to offer the most “options” and will have some of the lowest interest rates and fees associated with the loan. Conventional loans require you to show proof of income and will require a substantial downpayment. A conventional loan is best for those who have excellent credit scores, a low debt-to-income ratio, and a downpayment equal to or greater than 10%. This type of loan is fitting for more established attendings, or new attendings with no student loans and savings for a downpayment.
FHA Loans (loans backed by Federal Housing Administration) are going to have higher rates and more fees than a Conventional Loan. Fees include upfront mortgage insurance premium and monthly PMI. While an FHA loan may be helpful for those with a small downpayment and a low credit score, we wouldn’t recommend FHA loans for physicians. For those with a student loan balance, the FHA Loan will include the loan balances, which may prevent you from qualifying. Even if you can qualify for a FHA loan with your student loans, you are better off looking to one of the other 3 types of loans.
VA Loans (loan program offered through some banks, and are guaranteed by the Veteran Administration) will only be available to those who have access to VA benefits, so this isn’t an option for a majority of physicians. With a VA Home Loan there is no downpayment requirement or PMI. However, there will be a one-time upfront fee of 2.15% of the mortgage for first-time borrowers. A VA Home Loan may be beneficial for young attendings that are also considering a physician loan. If a lower interest rate is available through a VA Loan, you would want to compare whether the one-time fee of 2.15% for funding the VA Loan is offset by a lower interest rate.
With any mortgage option, you will want to compare interest rates, down payment requirements, and loan terms to fit your financial situation. When shopping for a mortgage it’s highly recommended you get quotes from multiple lenders. You’ll also want to compare apples to apples with each of these lenders. This means you want to get quotes for the same loan terms from each lender.
Down Payment
We generally recommend aiming to put at least 10% down and there are a couple of reasons for this. First, there is more of a natural appreciation for the purchase when you have to save for a while. Versus when you don’t put any money down and you can just buy a house that fits the range of what the lender offers. With a smaller downpayment, you might not appreciate the home as much and you might not be thinking about it as thoughtfully, which tends to lead to poor financial outcomes.
Secondly, the more you put down, the lower your mortgage payment will be and the less interest you’ll have paid over the life of the loan. In general, a bigger downpayment shows the lender that you have more skin in the game and so there is less risk for the loan. This allows the lender to offer you the lowest interest rate available and this is why we recommend putting down at least 10% for your home purchase. Even if the interest rate is .5% lower, the impact of the lower interest rate will provide substantial savings over time.
Physicians need to approach their home buying decision with thoughtfulness. Take time to define your priorities, consider what it means to afford ALL home expenses, and make an informed decision with financing one of the largest purchases you’ll make. Skipping any one of these practical tips can lead to a poor financial outcome, so take your time and pursue your home purchase with confidence!
As a trusted financial advisor for our clients, we’re here to help every step of the way. Whether that’s a first-time home purchase, or considering a 3rd short-term vacation rental, we help our clients align their capital with what they value most. If you’d like to learn more click on “Work with Us” at the top.
The foregoing content reflects the opinions of Panoramic Financial and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Panoramic Financial does not give tax or legal advice. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.