One of the most challenging parts about buying a home is making a down payment, especially for first-time buyers.
Conventional mortgages often require borrowers to make a down payment of 10 to 20 percent. Even the most accommodating mortgages in the conventional marketplace require a 3 percent down payment.
But lenders recognize that physicians, dentists, and other high-ranking medical professionals have very unique financial circumstances. That's why they afford doctors greater flexibility when it comes to putting money down to finance a home.
Unlike conventional mortgages, physician mortgage loans often waive down payment requirements. Banks offering this type of financing take the approach that a doctor’s income potential will more than offset the risk of buying a home with a significant amount of debt and little to no down payment, as many medical professionals do.
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But even if you can obtain a physicians mortgage with little to no money down, there are some short-term and long-term benefits to paying as much down on a home as possible:
- Easier approval. Putting a large down payment on a home doesn’t guarantee you’ll be approved for a mortgage, but it does improve your chances. That’s because it signals that a.) you have the ability to save money and make your payments, and b.) that you are less likely to walk away from the mortgage because you have a lot invested in the home already.
- Lower interest rate. Because of the reasons listed in the above paragraph, a down payment increases your creditworthiness in the eyes of the lender. The lower your credit risk, the lower your interest rate will be.
It’s obvious that a down payment will reduce the amount you have to borrow, which in turn will lower your monthly payment. But how much can you save and how much equity can you build by putting money down on the purchase?
Imagine three physicians in the market for a $350,000 home:
- One who just completed residency and has no money to put down.
- One who has been in practice a couple of years and has saved enough for a 5 percent down payment, equal to $17,500.
- One who has been in practice several years and can put down 20 percent, or $70,000.
The first physician gets a 30-year fixed mortgage at 4.25 percent, which results in a monthly principal and interest payment of $1,722.
The second physician also gets a 30-year fixed, but with the down payment gets a slightly lower interest rate of 4.15 percent. This results in a monthly principal and interest payment of $1,616.
The third physician can get a 30-year fixed with a rate of 3.8 percent, which gives them a monthly payment of $1,305. This physician could also opt for a 15-year fixed at, say, 3.25 percent, and have a monthly payment of $1,967.
The difference in monthly payments may not seem enough to warrant allocating your savings toward a down payment. But it may make a difference in how quickly you build equity in the home, especially if it’s possible you might sell in a few years.
Consider the above examples in a scenario where the physicians have a career opportunity that requires a move eight years after purchasing their $350,000 home.
After eight years, the first physician has a loan balance of just under $295,000, which means equity of $55,000 plus whatever amount the property has increased in value.
The second physician has a loan balance of $279,500, which means equity of $69,500 plus whatever amount the home has increased in value.
The third physician has a loan balance of just over $233,000, which means equity of $117,000 plus appreciated property value.
If the third physician chose the 15-year fixed mortgage, the loan balance would be $147,600 after eight years, which means equity of more than $200,000 to use toward the purchase of a new home.
Even with the benefits highlighted above, it may not be in your best interest to allocate the bulk of your savings — if you have money saved — toward a home down payment. Here are a few reasons why:
- PMI is not an issue on physician mortgages. One of the reasons mortgage lenders encourage down payment is to eliminate private mortgage insurance (PMI) from a loan.
- With conventional mortgages, one of the advantages of a 20 percent or more down payment is that the borrower does not have to pay PMI, which protects the lender if the homeowner can’t make mortgage payments and ends up in foreclosure. PMI rates vary, but some banks charge as much as 5 percent of the original loan amount. If you had to pay PMI on a high-end home, it would likely add $200 to $300 per month to your mortgage payment. But a key difference between a physician mortgage and a conventional one is that the former almost never requires PMI. Therefore, this is not an incentive to put a lot of money down if you are going to qualify for a physician mortgage.
- You’ll have less liquidity. Having a significant amount of accessible cash comes in handy when emergencies pop up. If you dedicate the bulk of your savings to your home, you lose access to that money until you resell the property. There is the option of obtaining a home equity loan or line of credit if you need to borrow against your house, but you’ll essentially have to go through the lending process again, including all of the fees and closing costs.
And while real estate is often a wise investment, you may be able to earn a better rate of return by investing some of that cash in, say, stocks or mutual funds.
Another option you can explore is paying mortgage discount points. These are fees a borrower pays to the lender at closing in exchange for a reduced interest rate. A point costs 1 percent of the amount borrowed, i.e. $1,000 for every $100,000 of your mortgage. So instead of using some of your cash for a larger down payment, you may want to consider “buying” a lower interest rate.
You’ll want to consult with your mortgage broker or another financial professional to determine whether it’s better to pay more money down, pay discount points, or just keep all of your money in the bank.
Learn more about doctor homes loans with:
The Ultimate Guide to Physician Mortgage Loans in 2021
Colin is the CEO & Co-founder of LeverageRx, a personal finance company exclusively for healthcare professionals. A former investment banker turned entrepreneur, Colin has well over a decade of experience in the financial services industry and is also a licensed life and health insurance agent. He was named Midlands Business Journal’s 2019 Entrepreneur of the Year and his work has been featured in Forbes, Council for Disability Awareness, Medical Economics, Dental Products Report, HCP Live, and more.