As a general rule, I recommend against residents buying a home for a number of reasons. However, there are exceptions to every general rule. More recently, I have become aware of a program that makes buying a home as a resident not quite as dumb, and perhaps even a good idea for many residents. The program is a grant program that provides up to a $10,000 down payment for low to moderate income homebuyers. The main reason I have recommended against residents buying a home is that the break even period for buying (typically 3-5 years) required for appreciation and amortization to make up for the transaction costs is remarkably similar to the length of residencies. However, when you throw a free $10K into the equation, that break even period can shorten considerably for many residents.
This program is called the National Homebuyers Fund. (I have no financial relationship with NHF, but many of my advertisers are mortgage lenders, including Josh Mettle, who bought me lunch and told me about this poorly publicized program.) Here is how it works:
- You must use an FHA, VA, USDA, or Fannie Mae 30 year fixed, full amortization mortgage loan.
- The $10K can be no more than 5% (3% USDA, Fannie Mae) of the purchase price.
- Your income must be below 115% (140% Fannie Mae) of the median income in your area. (140% is $68,700 in my county, $111,695 in San Francisco, $62,215 in rural Alabama, well below typical single resident incomes)
- The money can only be used for a down payment or closing costs, not as cash back to the buyer.
- You must have a minimum credit score of 640 (740 Fannie Mae).
- Your maximum debt to income ratio is 45%.
- Maximum loan is $417,000 (please don't buy even this much home if you're on a median income anyway)
- Available in 26 states: AL, AK, CA, CO, GA, HI, ID, IA, KS, KY, LA, MS, MO, MN, NM, NC, ND, OR, PA, SD, UT, WA, WV, WI, WY (There are two similar programs, one of which can be used in NV and CA, and one that is CA specific.)
- Do not have to be a first-time homebuyer.
Where does the money comes from?
The money to fund these programs comes from the penalties that lenders who were caught not following guidelines in the Global Financial Crisis had to pay. There are many similar programs in the various states that are funded by tax dollars. All of these programs change from time to time due to changes in funding.
How do I apply to the program?
The application goes through your lender. If your lender doesn't know anything about this program, find a new one.
Does this mean residents should all run out and buy a home?
No, you still need to run the numbers. Plus all the other reasons residents are usually better off renting still apply. But this does make it more likely that buying will work out better than renting for any given resident.
What do you think? Have you used a downpayment assistance grant or loan from a government entity to buy a house? Which program and are you glad you used it? Would an extra $10K convince you to buy a house as a resident? Comment below!
I would be happy to answer individual questions regarding the details of the program. I invite you to contact me directly.
What’s your contact information?
joshmettle.com – phone and email address are there.
Hello,
My name is Gina, and my husband and I are currently in the NACA program in Raleigh, NC. NACA doesn’t require a down payment or closing cost, but do allow you to buy down your interest rate.
It was suggested that I contact as many programs as possible such as this oneoffice to see if there are any grants available for down payment or closing costs assistance that would allow me to use those funds to buy down our interest rate.
Any information you can provide will be greatly appreciated. Thank you in advance for your help.
Gina
I would like to know how long does this process take? I just placed an offer on a home and was looking through the internet for some grants for me being a single mother buying a ho e and I saw this program.
How long does this take?
Hello, my name is Michael Weber and I’am currently in the NACA program in Baton Rouge, La. NACA doesn’t require a down payment or closing cost but do allow you to buy down your interest.
My NACA consultant suggested that I contact as many programs possible to see if there are any grants available for down payments or closing costs assistance that would allow me to use those funds to by down my interest rate just as this office if available.
Any information you can provide or give will be greatly appreciate. Thank you for your help.
Michael
good idea, and good timing as many new residents will soon hit the market after match day. I was lucky enough to come out of med school in 2009 and qualified for the “first time homebuyers tax credit.” what a great program that was…but even accounting for the ~$8,000 windfall, I think we still just barely broke even after living in the home 4 years.
To the new residents that will be looking for a house soon: think carefully about buying. Its not just a big financial decision when it comes to mortgage; there’s the cost of maintenance and the worry/anxiety that will inevitably arise when it comes time to sell in 3-5 years.
Does the grant money count as income for irs purposes? Do you get a 1099 or something else? Not that tax rates are that high on residents, but just a thought and something to factor into the rent vs buy decision.
Good question. I don’t think so but I’m not 100% sure.
THe biggest problem I saw with buying during residency was what happened to some people a couple of years behind me.
These unfortunate souls bought at the top of the market into a bubble market. Bad enough. It was made worse when our residency started falling apart and residents started looking elsewhere. It seemed like the renter residents were more likely to bolt rather than the condo owning residents. Those all seemed to think the residency would turn around!
Renting gives you options and relieves some headaches in an already stressful time.
I agree with you Steve. The trouble would be if housing prices go down and you are upside down on your mortgage (or even have to sell it for a loss). Tough thing for a resident to deal with especially if they don’t know whether they’ll be sticking around in the area. I certainly had no idea where I’d end up after residency.
“Your maximum debt to income ratio is 45%”.
That eliminates (I would guess) >90% of fresh out of med school residents.
Not if they’re on IBR/PAYE or still in the grace period or forbearance. Remember that’s the ratio of debt payments to income, not total debt.
I bought a house in residency which was 3 years (after my intern year)…
This was prior to the 8,000 first time home buyer credit and before this 10,000 help.
I ended up selling my house by myself and financially broke even to lost a small amount of money.
I was somewhat lucky, since the housing market was still depressed.
In hindsight it would have been easier for me to rent, but I don’t regret buying the home as it taught me a lot about real estate that helped a ton when buying my next home which is/was far more expensive. I also got to live in my own home for 3 years of residency which was nice for not only the comfort/size aspect but also the pride I took in ownership of my first home(maybe I am old school in this respect).
So, although I think owning a home in residency is not right for everyone, it can be a good experience and one certain residents should consider….especially if they can use an extra 10G to buy it!
Sorry, I failed to make some updates I had planned after doing some additional fact checking prior to publication. Those of you who read this in your email may notice it’s slightly different here. The main one is it isn’t limited to $10K, it’s 5% of whatever. It could be over $20K, although I think for most it’ll be in the $10K neighborhood.
Seems like you should’ve definitely said it is 5% of purchase price rather than 10k, at least based on how I’m reading the documents. I probably would’ve considered this if it was a minimum of 10k and buy a smaller house in the $50-75k range rather than renting an apartment, but I’ve I’m only going to get 5% of that amount it probably isn’t worth it.
Wow! Where are you training that houses cost $50K?
How does this work for married couples? Do you have to take into account the spouse’s income and debts or can it be ignored? Is there a scheduled expiration date for this program or does anyone know how much money it still has backing it? The ideal time to take advantage of this program would be after Match, but before you start your residency job. Easier for spouses that make money then for other groups.
What is the minimum required down payment to qualify for one of the programs excluding the free 5%?
Running the numbers in my area, rent can easily be 800-900 for a single family home that sells for 95-120k. Owning a home easily comes out ahead when you ignore Realtor fees. Add in Realtor fees and it can be a wash. If I qualify for this program, it would be a no brainer for a four year residency.
Will the spouse be on the loan? That’s what determines if the spouse’s income and debts are ignored. There is no expiration, but I don’t know how much money is still in it. I don’t think there is a minimum down payment. I disagree that buying a home with those numbers is a “no-brainer.” $850 to rent a $110K home represents a cap rate of only 5.1%. Hardly a great investment. Remember there are a lot more expenses and hassles to owning than just making a mortgage payment. Now, if you told me that home rents for $1500? Sure, buying it will probably work out fine. My rental home rents for $1145 and is probably worth $120-130K. I’m cash flow negative on it…on a 20 year mortgage. Insurance, maintenance, taxes etc etc.
I think a cap rate for the area is closer to 5.4% using your conservative 50/50 split of income/expenses. Probably worse for people who want a fenced yard. I get your point. I know there are assumptions baked in, but using NYT’s rent vs buy calculator, a 100k home renting at 900 a month with no utilities paid over a 4 year period would have a break even point of 473 a month. Buying a house would free up nearly 427 in monthly income and over a 4 year period, that would be nearly 20500 in income.
You sure you’re using that calculator right? $20K seems like an awfully high amount to me. What did you use for transaction costs?
I cannot think of the exact numbers that I used, but here is my example:
Home Price – $100,000
Length of Stay – 4 Years
Mortgage Rate – 3.86% (Preset)
Down Payment – 5% (Free Money)
Mortgage Term – 30 Years
Home Price Growth Rate – 3% (Preset)
Rent Growth Rate – 2.5% (Preset)
Investment Return Rate – 0% (Free Money Turns This to Zero)
Inflation Rate – 2.1% (Preset)
Property Tax – 1.35% (Preset)
Marginal Tax Rate – 10% ($100,000 Joint Income)(This number probably worthless because using standard deduction)
Buying Cost – 4% (Preset)
Selling Cost – 6% (Preset)
Maintenance Fee – 1% (Preset)
Home Owner Insurance – .46% (Preset)
Monthly Utilities – 0% (Single home landlords in my area do not pay for any utilities)
Monthly Common Fees – 0% (Preset)
Common fees deduction – 0% (Preset)
Security Deposit – 1 Month (Preset)
Broker’s Fee – 0% (Preset)
Renter’s Insurance – 1.32% (Preset)
“If you can rent a similar house for less than … $441 Per Month … then renting is better.”
Assume $900 a month rent for a house valued at $90,000 with Zillow that would probably sell for $100,000.
You are looking at a cap rate of 5.4% if this were an investment property. However, if you are looking at living in this house you would be looking at an additional ($900-441=) $459 a month in cash flow. Add in an emergency fund and you could minimize any potential cash flow issues associated with buying a house. That $459 would put you ahead $22,032. I believe you could also add the $5,000 in free equity to come out at $27,032 ahead over a four year period. (These numbers do not include the savings that paying off student loans with that money would give you)
Is this for everyone? No. Start adjusting inputs and things could go drastically wrong. Say you can find another $100,000 home that rents for $700, you just lost $9,600 in savings. Say you buy a more expensive house than you would otherwise rent, savings would also be reduced.
There is really not a fair comparison for the poster losing $35,000 in home value, because we do not know his comparative rent and he additionally would have gained $5,500 in equity from the grant program.
All of this is to say that buying a cheap, but nice small home during residency can be a great financial decision. This grant program makes it even better. However, the more you pay for the home in residency, the less attractive this deal becomes and the more risk you take on.
Monkey with that home price growth rate. Make it something like -10%. Then see how things end up. The point is that with a time horizon of 4 years you’re basically gambling on appreciation. Residents who bought homes in 2002 and 2010 did just fine. Those who bought in 2006 did terribly. What does your crystal ball say? Does 3% seem reasonable? Sure. But how wide is that bell curve?
Would you agree that there is a minimum amount that you would have to pay to rent a single family home in any given city? Let’s assume that we are trying to compare the $100,000 house above. How low can rent go? I would argue that homes cannot be built for under a certain price. In my area, I suspect you can’t rent a home valued at $100,000 for under 800. That would make sense considering your cap rate formula would be 4.8% and people might as well just put their money in the stock market instead of owning rental property. At this point using the 3.0% growth rate above you would be making an estimated $17,232 over four years and an additional $5,000 in free equity for a total of $22,232.
We have now quantified the rent vs buy choice over a 4 year period using a base line of 3% home price growth rate.
Using a 0% yoy growth rate, the example above would be $6,480 over four years plus $5,000 in free equity for a total of $11,480.
Using a -2% yoy growth rate, the example above would be -$144 over four years plus $5,000 in free equity for a total of $4,856.
Using a -3.6% yoy growth rate, you would break even.
Using the lowest possible growth rate the NYT calculator allows at -5.0% growth yoy, the above example would be -$9,312 over four years plus $5,000 in free equity for a total of -$4,312.
One final example, if instead of using 800 rent, which in my area would be hard to find and the more reasonable 900 rent. A -5% yoy growth rate for the example above would be -$4,512 over 4 years plus the additional $5,000 in free equity for a total of $488 gain. This also happens to be what I currently pay for a house worth less than $100k.
Bad things can happen – I get it. Bad things can happen in a lot of situations. That doesn’t mean we should hide under a rock and shout market timing anytime anyone wants to buy a house during residency. The house purchase just has to be well thought out. More to your point, I think my example above shows that 4 years is enough time.
The key to my above example is buying a low cost house that will be less effected by swings in market home value due to minimum building costs for new housing and larger subsection of the population that could buy the home. I would be happy to look at any data you have on historical yoy losses averaging greater than 5% for any given 4 year period.
If you’ve run the numbers, and think it’s a good bet, then go for it. I just want people to run the numbers for their individual situation. The fact that you’ve messed with the NYT calculators means you’re probably making an informed decision. Most residents, however, do not do that unfortunately. It isn’t that it never works out well, obviously it does. But it works out poorly often enough that renting your house in residency is a reasonable default. And as this post notes, if you get free money, it shifts the calculation significantly.
Upon what is the income number based? Last year’s W2? Your most recent paycheck? Your expected income going forward?
I only ask because I can think of a situation (ie mine in about 6 months) where a resident or fellow has just graduated and is looking to buy a house around the time they start their first attending job. Would they qualify?
I’m going to answer a couple of questions that have been posted above and below.
My CPA and others I have asked have told me the grant funds are not a taxable event. I’ve not personally read the IRS code, but I’ve not heard anyone say anything to the contrary.
Regarding debt to income, if you are financing via a non-conventional loan, you can qualify on your IBR or PasYE payment, or if you happen to be deferred for greater than 12 months, they are left out of your debt to income ratio (DTI) all together. If you are using NHF in conjunction with a conventional loan, you will need to qualify based on estimated full repayment amounts on loans, which will exclude most residents.
With FHA’s current rates around 3.5% on a 30 year and their newly reduced .8% MI, FHA is the most likely and advantageous financing scenario for residents using NHF.
The income limits are calculated on just the borrower(s) on the application, meaning if you qualify without your spouse’s income, leave them off the application so you don’t exceed the income limits.
The FHA required down is 3.5% and the conventional is 5%. Both would allow for zero cash out of pocket (assuming the seller covered your closing costs).
The income will be based on either your current pay-stubs or if you are leaving med school entering residency, it will be based on your future residency contract and income. You can close on future income from your contract, prior to starting residency. If they were in residency and going to attending position, they would qualify off current income, so they would likely be fine.
Interesting! If this is the case with spousal income, a lot of attendings could qualify with modest spousal income of 60-70k. Maybe not the 500k+ house that they want, but at 417k that still buys quite a bit of house. Do you know why it is not available in all states?
Good point. Interesting strategy. Just have your wife buy the house.
One other thing I was thinking about. It says the maximum loan could be $417,000. Nothing stopping you from putting down 20% or more and buying a $500,000+ house. Then again, I don’t know how much a company would be willing to lend someone with ~$60,000 income even if they put down 20%+.
Exactly. That’s the limiting factor.
Oops! I just realized I made a mistake on this comment entry and I want to fix it.
NHF grant will go up to 5% of the first mortgage loan amount on FHA and VA.
NHF grant will to up to 3% of the first mortgage loan amount for USDA or Conventional.
The conventional NHF program is maxed at a 95% loan to value and they only come with a 3.00% max grant, thus if going conventional, you would need at least 2% of your own down payment (or gifted). Sorry about that oversight on my part.
I know this post is old, but I hope I get a quick answer. If my area’s income limits for NHF grant is $80998. Is this AGI? or total income? We have a few thousand in Employee expenses (2106) that when applying for FHA loan they considered and deducted that from our income for qualifying. I want to know if the NHF grant program does the same.
If they use strickly total income, we “make” just 2800 too much.
Good question. I don’t know. You’ll probably have to call. After you do, please post here.
I am an intern and my wife and I bought a home last May and are in a 7 year ARM. Is this program available for refinances? Our plan is to get into a 30 year fixed and try to rent or sell before 7 years. Great info above. Thanks!!
Yes, you can refinance that loan. It may have a prepayment penalty, you’d have to check your loan documents. Good time to get into a 30 year fixed if you will hold this longer than 7 years. If not, might as well stick with the ARM. It’s fixed for 7 years.
Would this program apply to a refinance or just primary home purchases?
I’m an intern moving to a nearby city after my preliminary year and my wife, baby and I are tired of moving (this will be the 10th time in as many years). We have spent much of this year in a renovated triplex without wall insulation sandwiched between bedrooms and their accompanying noises above our ceiling and behind the wall adjacent to our bed so my wife has put her foot down for a single family home.
We are planning to buy a home and I have been checking out the doctors loans available which aren’t bad, but we are now looking at the NACA loan options. Essentially they force you to meet with a financial counselor to get your act together before applying for their loan but their 30y fixed rates start out lower than most of the 7y ARMs I got from banks offering doctor’s loans (3.375 vs 3.325-3.625 from the 3 banks I have asked so far) and they cover all closing costs of the loan itself. The only catch I have found is that you have to attend a couple of their meetings a year to vouch for their services and pay $25 a year to be a “member”. The other catch is that there are limits to how much you can spend in certain areas, but honestly someone in my current situation has no business spending more than they allow (252k in the area I am looking). There are no income limits and there is no PMI. They also offer a 15y fixed at 2.875.
We haven’t followed through on everything yet, but just from the looks of things this could be a great option especially for someone just starting out in residency.
I hear this a lot as a reason to buy. “I’m sick of apartment living.” I don’t see that as a reason to buy. It’s pretty easy to rent a single family home in most areas. You still need to do the buy vs rent calculation.
Sounds like a great option you’re looking at. Just make sure it’s right for you.
Buying a home during residency was by far the worst financial move I ever made and most residents could make. We bought in 2009 got the 8k credit and were duped into thinking we were getting a good deal because the market dropped already. We loved it in residency, however residency ends. It was absolutely impossible to sell without about a 35k loss (home price was 110k at purchase which was a huge drop from what the previous owner paid). We first managed the home out of state and were able to make a tiny profit (we had an ideal renter). We then hired a rental management company because it was too difficult to manage. It has been a disaster both financially and the amount of stress it has caused trying to manage evictions out of state and long lists of repairs. Be vary wary before buying a house especially if you don’t see yourself in the area long term. Do not assume you can sell and don’t let lenders or real estate agents talk you into anything as they are always looking for a commission.
Buying a house for residency seemed great at the time for my family in 2009. It has turned out to be an expensive and stressful disaster. You have much better things to worry about and spend your money on right out of residency. Keep your life simple and rent. Remember that mortgage brokers and real estate agents don’t necessarily have your interests as motivation and will rarely tell you it is not a good idea to buy.
Buying a house in residency was one of the best financial decisions I’ve made. Significant appreciation and low purchase price with low rates worked out great.
2002 and 2010- works out great. 2006 or maybe 2015? Not so much.
Is your 2015 comment pessimism? playing devils advocate? or your prediction?
Just reflecting the fact that the future is hard to predict. Home prices nationwide have appreciated significantly since 2010 and trees don’t grow to the sky.
I agree that the default setting for residents should be not to buy, but there are exceptions. I did a 5 year residency in a city with some of the cheapest real estate in the country — and therefore a severe shortage of quality rental property. Loan qualifying was a lot easier in those days, too.
We bought in the cheapest neighborhood in the city’s best school district — most of our neighbors were blue collar and low-end white collar workers who had the same idea. It was 1994, and I think we paid $80K for a 3 BR 2 bath, 2 car garage house. Our kids got to feel what it was like to be the “poorest kids in school.” Not a bad experience to have under their belt for later in life.
We sold at the end of residency an even got a check for a few thousand dollars, and paid less monthly for our mortgage than we would have paid for rent — with no risk of being evicted because an owner decided to sell a rental house. It was a great financial decision for us.
Any number of things could have made it disastrous — the residency losing accreditation, divorce, desire to change specialties. But all of those things were vanishingly remote in possibility.
I guess my point is that sometimes the stars line up — but they REALLY need to line up, and even then it was a little scary when it took a few months after we had left for the house to actually sell. Those who say that it is a no-brainer to buy rather than rent are taking an unwarranted Pollyanna view of life.
Can one wait the last year of residency to apply for a mortgage in another state, and still reap these benefits? For example, I am in my last year in residency in NY and plan to relocate and work in GA. Can I qualify? I assume they will use my last documented income instead of my potential six figure Attending income, right? Any thoughts? Love the site, btw.
I bet you could pull that off as long as you used your actual residency income instead of attending contract for income. Better check with the lender though.
I’m in the same situation-finishing my fellowship and moving to a new state in July for my first job.
I spoke to the lender I’ve been working with (Mettle Group) and they said the underwriter has to project my income for the next 3 years (not the last 3) so I won’t qualify.
Thanks for the great resource, bookmarking this page!
A few questions here, that others might find relevant w/ tax time coming up:
1) So, are we fairly sure at this point that this is not taxable income?
2) Can I still claim closing costs on taxes, even though this (NHF) grant covered them?
3) Are there any hidden costs to refinancing or selling, after one full year of residency?
4) I am very confused w/ MCC tax certificate and how it applies to NHF grants, are we eligible?
Very glad I found this site, more info here than I can find anywhere else right now, bookmarked!
Question: I bought a home in June 2015 and received a NHF grant, which shows on my HUD-1, so because I received grant money which paid all of my closing costs, including prepaids (taxes, interest, PMI), which are tax deductible, does that mean that they are not tax deductible to me since I did not technically pay them as another buyer would who did not receive grant funds? I have searched and search for the answer to this question and am hoping you can help me here!
Thanks.
No, I don’t think you can deduct that. You’re not reporting the grant as income are you?
Just called the NHF office. Sounds like the program is going away on 2/29/16.
This is true, we just received notice this program is over this week. There are plenty of other 100% financing options available with low rates and no mortgage insurance, they just don’t give you free money for down.
Is this program still available? I read somewhere that this program has been suspended as of Feb 2016. I’m a little bummed about it.
Yep it did go away, however there is another program called CHENOA that is very similar. Basically they record a 2nd mortgage in the amount of the down payment, which is forgiven after a few years of on time payments. Email me if you want more info [email protected]