Mortgages are the most common type of debt held by physicians, according to the Medscape Physician Wealth & Debt Report 2021. Nearly two thirds of physicians report that they are making payments on a housing loan.
Taking out a mortgage and becoming a homeowner may happen later for physicians than for other professionals, owing to additional years spent in school or working as a resident for little or no income. Even so, it's important to take your time when purchasing a home (often the most expensive asset you'll own) and taking out a mortgage (often the largest financial commitment you'll make).
Before applying for a mortgage, you'll want to answer the following questions:
How long are you planning to stay in this home? In general, it doesn't make sense to buy a home unless you're planning to stay in it for at least 3-5 years, which gives you enough time to build up enough equity to cover the costs associated with the mortgage. If you're not sure you're going to stay in your current city or you expect your housing needs to change (because you're starting a family, for example), renting may be a better move for now.
How much home can you afford? The best way to determine the answer to this is to use a mortgage calculator to estimate your monthly payments on a given house and see whether they fit into the rest of your budget — including other expenses, such as childcare, student loan payments, and discretionary spending (eg, eating out and vacations). This budget should also include the additional expenses of home ownership, such as taxes, insurance, and HOA fees. Keep in mind that house maintenance and repair can cost twice as much as you've budgeted for it. (Many say that the phrase "money pit" is well warranted.) A quick rule of thumb while shopping for a home is that it should be less than twice your annual salary.
Do you have an emergency fund? Best practice is to have at least 3-6 months' worth of expenses in a liquid account for unexpected expenses. That's even more important once you become a homeowner — a leaky roof or broken hot water heater can cost thousands to fix, and you don't want to wait to start repairs while you liquidate assets. Plus, you'll want the funds to cover the mortgage itself if you're temporarily unable to work.
Have you shopped around for a mortgage? The interest rate you'll pay and other terms of your mortgage may vary from one lender to another, so it's worth checking in with a few lenders to make sure you're getting the best deal. Consider getting a quote from a large national bank; a regional bank or credit union; and an online bank or financial technology lender.
Have you checked your credit report? Lenders use your credit score and report to help them decide whether to lend to you and at what rate. In general, you can increase your credit score by paying down revolving credit (such as credit cards) and making sure that you're never late on other types of payments. You can pull your credit report for free at annualcreditreport.com to see what the lenders will see and make sure that the report doesn't include any errors.
What if I'm not buying the property on my own? If you're in a two-income household, you'll most likely want to factor in both your and your partner's incomes. If you're not married, however, one of you (typically the more qualified borrower) will apply for the loan. You'll also want to work with a lawyer to establish a cohabitation agreement and determine the best way to hold title for the property to make sure that you're both protected.
To get a mortgage, you'll need to pass muster with a lender who will evaluate your credit history, income, and ability to make a down payment. For a conventional mortgage loan, lenders require a down payment of at least 20% (or you'll need to take out private mortgage insurance) and a debt-to-income ratio of 30% or less.
In recognition that many young physicians may be able to afford the payments on a loan but may not have the funds for a large down payment, some lenders offer a special type of loan known as a "white coat mortgage" or a "physician's mortgage." The rules for these loans are more flexible, often requiring no down payment at all and removing or reducing student loans in debt-to-income calculations.
White coat mortgages can make it much easier for young physicians to qualify for a loan, but it's important to understand their disadvantages. First, these loans will almost always carry a slightly higher interest rate. In addition, if you purchase a home without a down payment, it can take several years to build up enough equity in the home to offset your mortgage closing costs — which can be 2%-3% of the loan balance. Finally, if the price of the home goes down, you could end up owing more money on it than it's worth.
These issues won't have a significant financial impact if you can make your monthly payments and plan to stay in the home long enough to start building equity back up (or for the housing market to recover). If you need to sell, however, you could end up losing money on the property. This can especially be a problem for residents, who may have to move after only 3-4 years for a fellowship or their attending job and thus may be forced to sell their home in unfavorable circumstances.
In addition to conventional mortgage loans and white coat loans, there are other types of loan products to consider, such as VA loans (for veterans) or FHA loans. In more expensive areas, you may need to take out a "jumbo loan," which can have additional requirements for borrowers. It's worth looking into any mortgage for which you quality to determine the best one for your needs.
Whether you're getting a white coat mortgage, a traditional loan, or some other type of mortgage, you'll probably get a choice between a fixed-rate or adjustable-rate loan. Here's what you need to know:
Fixed-rate mortgage. These mortgages have a pre-set interest rate that remains the same over the life of the loan. A standard fixed-rate mortgage has a term of 30 years, but you can get a mortgage for 15 or 20 years as well.
Pros : Your mortgage payments will remain stable, creating a hedge against future inflation when it comes to your housing costs. Fixed-rate mortgages are particularly attractive when mortgage rates are low because you'll probably be able to lock in an interest rate lower than what you could secure in the future.
Cons : The rate on a fixed-rate mortgage may be higher than the starter rate on an adjustable-rate loan, because you're paying a premium to ensure that your rate never goes up.
Adjustable-rate mortgage (ARM). This is a type of variable loan. In an ARM, you'll pay a fixed rate to start for a set period of time (often 5 or 7 years). Once that period expires, the rate will be adjusted according to market interest rates. The rate may continue to be adjusted annually on the basis of the terms of the loan.
Pros : The initial rate on an ARM is typically lower than that for a fixed-rate loan, so you can save on your mortgage payments each month. ARMs are often worth considering when interest rates are high, when those upfront savings are larger, and there's a chance that rates could go down in the future.
Cons : If rates are significantly higher when your ARM resets, your mortgage payments could go up substantially.
Keep in mind that no matter what type of loan you get, you may be able to refinance it later for more favorable terms. However, if interest rates are higher when you refinance, you may not be able to lower your monthly payment.
Physicians who are more established in their careers may find themselves considering a second-home purchase, either as a vacation home or an investment property. White coat loans typically only apply to primary residences and thus are unlikely to be an option here. In general, the credit and income requirements for second homes are a bit more stringent than those on your first.
In addition to using a traditional mortgage, you may consider using a home equity loan or line of credit to finance the purchase of the second home. While this method may mean slightly lower rates and an easier application process, it also means that you're reducing the home equity in your first and essentially using it as collateral for your second. It's important to understand the risks involved with such a transaction before moving forward.