As a medical resident in training, your life is hectic. Fortunately, you have plenty to look forward to in professional practice like:
- A chance to relocate to a new city.
- Making a difference doing what you love.
- And of course, earning much more money.
We understand this is nothing new to you. But have you considered how these factors should influence the type of house you buy? Here is what you need to know about buying a home as a resident.
In all likelihood, the first home you buy won’t be the last. Someday you will be ready to upgrade. And when that time comes, your income will allow you to buy or build the home of your dreams.
But until then, all you need is a place to stay. With this in mind, consider buying a home for less than:
- What your budget can handle.
- What your mortgage lender will approve.
Selling a home after a short period time is often a challenge given the owner's lack of equity. (Home equity is the difference between the its current value and the amount owed on the mortgage.)
Most first-time homebuyers stick to small down-payments. If you take out a physician mortgage loan, you will likely be able to secure zero-down financing. Sure, bypassing the downpayment now means not having any equity to start. But given the career tragectory and income potential of doctors, this can be made up in no time.
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For many, this tactic will make it challenging to it put a significant dent in your mortgage balance during your residency. But if possible, this can make a huge difference when the time comes to re-sell.
Most of a homeowner’s monthly payment in the early years of a home loan is paying interest. That's because you pay interest on the amount you owe on the mortgage, even though your principal and interest payment will remain fixed for the life of the loan (assuming you have a fixed-rate mortgage). Since your principal balance is at its peak in the earliest years of a mortgage, more of your monthly payment will go to interest. In fact, making your minimum monthly payment for five years may only pay down 1 to 2 percent of your original principal.
Buying a home for less than you can afford will allow you to build equity faster. You can make extra principal payments on the mortgage. You can even make improvements that increase the property’s value.
Do what you can to avoid buying a properties that are:
- Already at peak value.
- Low-priced with low appreciation potential.
In addition to your raise in income after residency, there’s the chance you will need to move. So you may have to sell your house quickly. You may not have the luxury of waiting until a few years after residency to selling to build more equity.
Therefore if you're thinking of buying a house to live in during your residency, you may want to consider more than what you want. It may be beneficial to put yourself in the shoes of the person who you might sell the house to. What will they want in a house?
Talk to your real estate agent about the most popular features among buyers in your area and try to find a home with as many of those as possible. Do people in that market want fenced yards, open floor plans, or a certain number of bedrooms and bathrooms?
When it comes to determining property value, the most important factor is location, location, location. Selecting the right location may be the most important decision you make today to generate a decent profit at resale.
Selecting a popular area that’s already selling high decreases your chance to profit later. The same goes for areas that have little chance of increasing desirability.
Settling in an up-and-coming area will empower you to buy low and sell high. Look for areas with steady population growth, strong economic activity and low crime.
Yet perhaps most important is the quality of the local school system. Sure, this carries little weight to a physician without children. However, chances are it will matter to potential buyers. Try to prioritize your search to school districts with positive reputations. The closer you can buy to an actual school building, the easier it will be to maximize your home’s re-sell.
It wouldn't hurt to factor market rental rates for the area into your decision either. If you need to move in a few years and can’t sell the house for enough to cover your mortgage, you may have to rent out the property at first. Checking local rental rates will allow you to determine if it’s possible to collect enough in rent to cover the mortgage and expenses, if not earn an outright profit.
Although you should keep the next buyer in mind, don’t lose sight of your own needs. As a resident, you don't have much time to for maintenance and upkeep. One way to minimize this extra work is to buy a condo or townhouse. Unless you truly enjoy lawn care or general repair, avoid homes with significant landscaping and cosmetic needs. And of course, try to live as close as possible to your workplace to minimize your daily commute.
Buying a home as a resident is perfectly reasonable if you are:
- Realistic about your immediate needs.
- Proactive in your planning for the future.
- Strategic about your plan to maximize value and build equity.
By sticking to these best practices, you are setting yourself up to buy your dream home even sooner than you might think.
Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.