Buying a house during residency is a big decision. On one hand, purchasing a home can help you build roots and equity in the community that you practice in. On the other, it can put you further in debt than you can truly afford. Medical residents in training have a hectic life but it's exciting to think about moving to a new city, doing what you love and earning a high salary. Have you considered how these factors should influence the type of house you buy? Or if you buy one right now at all?
Why buying a house during residency is Smart
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. Using a doctor-friendly physician mortgage, here are the reasons to buy a house during residency:
- Build equity. If you buy a home, you can cash in your equity later or even sell it for a higher price than you bought it for to make a profit.
- Rent spare rooms to fellow residents. Renting out the extra space in your home to other residents can help your home purchase pay for itself.
- You may extend your residency for a fellowship in the same are. If you extend your residency for a fellowship, buying a home during residency ensures that you have a smooth transition into this next chapter of your career.
- Make the space your own. Buying a home makes it easier to customize your space and create the perfect space to relax after a busy shift.
Why Buying a House During Residency is Dumb
Residents tend to forget that they don't make very much money, they are likely to move soon and oh yeah, they don't make very much money. Here are the reasons why buying a house during residency is dumb:
- More debt, really? Buying a home will cause your DTI to grow, making it difficult to take on any additional credit in times of need, and lengthening the amount of time until you are debt free.
- Low salary. According to the American Medical Association (AMA), first-year residents make an average of $60,000 a year. It’s easy to get caught up in the anticipation of a large salary, but it shouldn’t be your only driving factor in your decision to buy a home.
- Houses can be expensive. Residents often spend over 80 hours on the clock in a given week. If this is you, you don’t really have the time to mow the lawn, fix the roof or shop around for a new water heater. Houses are money pits, so consider this before buying.
- You may move. If you take a fellowship away from home, or get invited to work at your dream hospital across the country, you will find yourself either as a landlord or needing to sell your home rather quickly.
LeverageRx works with just about every physician mortgage program in the country. These loans are forgiving, generous and accommodating to the physician or dentist, or doctor in training. For example, your debt-to-income ratio isn't a problem because they'll waive your medical school loans. Moreover, physician loans don't require you to pay private mortgage insurance, which saves you hundreds of dollars a month. So who offers such mortgages? A few examples are below.
First National Bank
First National Bank accepts a wide range of designations for their physician mortgage. The bank offers 100% financing up to $1MM and the loan is eligible for primary residences and vacation homes. Learn More: First National Bank Doctor Mortgage Review
Flagstar's physician loan program is available for more medical specialties than other doctor home loan programs. You can get 100% financing up to $1.5MM for primary residences only. Learn More: Flagstar Physician Mortgage Review
Fulton Mortgage offers 100% financing up to $1MM for MD, DO, DDS, DMD, OD, DPM, DVM and PharmDs. It's available for primary residence only and in a few select states. Learn More: Fulton Mortgage Physician Loan Review
TD Bank's physician mortgage is a popular choice among LeverageRx readers for its low rates. The bank provides 100% financing up to $750k for both residents in training and those in attending. The loan is for primary residence only. Learn More: TD Bank Physician Loan Review
Citizens Bank has a great physician mortgage program for MD, DO, DDS and DMDs. They offer construction financing and 95% financing for loans up to $650k. Learn More: Citizens Bank Physician Mortgage Review
Huntington Bank offers physician mortgages to veterinarians, as well as physicians and dentists. They provide up to 100% financing of up to $1 million, 95% up to $1.25 million, and 90% up to $2 million. Like TD Bank, physician loans apply only to primary residences. Learn More: Huntington Bank Physician Loan Review
Bank of America
Bank of America a nationwide lender offering physician mortgages in nearly every state. The bank offers financing of up to $1 million with 5% down, and 10% down up to $1.5 million. Learn More: Bank of America Physician Loan Review
KeyBank offers doctor home loans on primary residences and vacation homes, as well as cash-out refinances (which is rare). Loans are available for up to $3.5 million, including 100% financing on mortgages up to $1MM. Learn More: KeyBank Physician Mortgage Review
Just because a physician mortgage loan is available to you, does not mean it is the best decision. After all, if you can put more money down, you are essentially guaranteed more equity and will pay less in interest over the long run. Here are some common situations for fellows or residents in training who buy a home but don't take out a physician mortgage.
The Resident Uses a Spouse's Income
Applying for a mortgage when you have a spouse can make the process much easier. This is because both of your incomes, as well as your credit score and DTI, will be taken into account by the lender. If a physician's loan does not make sense for your family’s unique financial situation, using both you and your spouse's income can still land you a decent FHA or conventional loan.
The Resident Built Up Savings
If you have significant savings, you may want to consider tapping into them to help you fund buying a house in residency. First, you will want to weigh out the pros and cons of where this money would be best spent: your student loan debt or your mortgage. If it is the latter, take some time to decide if potentially draining your savings is a risk that you are willing, and financially ready, to take.
Family Helped the Resident Make a Down Payment
If you have access to loved ones with generous pockets, you could potentially reach out to them for help buying a home. In this case, you will want to ensure that you and your loved ones understand the tax implications of a large financial gift. This tax is called gift tax and applies whether or not the help is meant to be a gift.
Let's say you already made your decision and are going to buy a house as a resident. Before you make a move, here are key considerations.
So, you found your dream house, but it is 45 minutes away from the hospital when traffic is light. You are going to have to make an important decision: you already work long hours, do you really want to be stuck with a long commute? Or, more importantly, can you live that far away? Depending on the program, you may have to live within a certain distance away from the hospital.
All of the costs
It is no secret: buying a home is expensive. Before you decide to buy one, make sure that you have considered all of the costs. Here are a list of costs that you will want to keep an eye out for:
- Closing costs.
- Property taxes.
- Homeowners insurance.
- Increased utility usage.
- Cost of replacing broken appliances.
- Cost of home improvement.
- Realtor fees.
- Earnest money.
When you make a downpayment, you are lessening the amount of money that will be subject to interest overtime and therefore, saving yourself money. Depending on the type of mortgage you take out, you may be required to put down a percentage of the value of your home. Typically, this is between 3% and 20%.
It might be tempting to look at the lax DTI requirements of physician loans and think “if the lender think’s it’s okay, it must be!” However, thinking this way could get you in hot water.
If you are a resident, there is a high chance that you are already looking up at a mountain of student debt. Even though doctors can make a healthy salary, no one guarantees that it will be enough to keep your head above water should you find yourself miscalculating how much debt you can afford.
The housing market
Anytime you buy a home, it is important to pay close attention to the market. If you are in residency, this could be even more important than ever. After all, if you buy while the market is inflated, you may take on quite the loss if you have to sell quickly and the market is down.
If you are thinking that you will just rent the home out if you can’t sell it for a profit, you might want to think again. Chances are, you will not have enough time to manage being a landlord during your residency and paying someone to do it for you might not be worth it.
It can be easy to look over the value of your own time when you are thinking about buying a home. However, doing so can easily result in burnout and financial loss.
Before you purchase a home, consider if the free-time that you do have would be best spent working on your home or somewhere else.
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.
Micah believes financial literacy is the key to building lasting wealth, security, and the ability to make life-changing financial decisions with confidence. For his own website and others, Micah writes thoughtful personal finance content that makes a positive impact in readers' lives. You can find his past work on Micah Murray Freelance and Money Under 30.