[Editor's Note: Josh Mettle (Physician Home Loans At Fairway Independent Mortgage Corporation) and I go way back. He originated my now paid-off mortgage loan, has been advertising on the site for years, has done several guest posts, and has even sponsored some of my speaking engagements. But I initially told him I wouldn't run this post because it read like an ad, despite the importance of the information in it. So he rewrote it from a more educational perspective and here it is.
This information is important because it could potentially change my mind that buying a home as a resident is a bad idea. The main problem with buying a home as a resident is you won't be in the home long enough for appreciation to overcome the significant transaction costs of buying and selling, not to mention the other costs and hassles of homeownership. But when someone is subsidizing the transaction costs, then it's easier for buying as a resident to work out well. You still have to run the numbers and consider the other factors of course. In this post, Josh tells us about some programs that subsidize the transaction costs by giving you free money.]
Home Finance Agencies (HFAs) across the country have been allocated money from the Federal Government [as part of the settlements from the Global Financial Crisis-ed] to be used for down payment assistance for low to moderate income borrowers. Each state or county may have a different HFA and their specific grant amounts and guidelines will vary accordingly. Currently, the counties and institutions below are within the footprint of qualifying HFA’s where money is currently available for residents and fellows if they qualify under the income restrictions for the particular HFA they will reside in.
Challenges for Resident Physicians Wanting To Buy A Home
Josh Mettle
One of the biggest challenges with down payment assistance programs has long been the issue of student loans and the way underwriters calculate payments on deferred and Income Driven Repayments. The general rule has been to default to one to two percent of the outstanding student loan balance as a MONTHLY payment. 2% of $200,000 equals a monthly payment of $4,000, which means the applying resident will be lucky to qualify for a Cracker Jack box to live in.
Another challenge has been the issue of qualifying for the loan and down payment assistance, without being able to present any pay stubs, in the case of a transitioning medical school student graduate with only a Match letter in hand. Most incoming residents don’t want to move twice. Having to start residency, obtain two pay stubs and then apply for a loan is about as appealing as switching places with the cadaver in gross anatomy lab.
The problem has been finding a loan that accommodates the unique challenges that resident physicians face in qualifying for a loan, and that will work in conjunction with down payment assistance. Some lenders have been able to successfully solve these challenges for incoming and existing residents and fellows – thus qualifying you for the down payment assistance money.
Programs vary from county to county, so I’m going to give you a general overview of the pros and cons. Feel free to post additional questions in the comments section or to email them to me at [email protected]
Pros of a Mortgage Down Payment Assistance Program
3.5-7% Subsidy
Depending on the county in which you are buying, the down payment assistance equals between 3.5% and 7% of the loan amount. For example, if you buy a $300k home and your loan amount is $291k (less required down payment), your down payment assistance would be between $10,185 and $20,370 depending on the county you buy in.
Once you qualify and receive the down payment assistance funds, there are no strings attached. You do not need to pay that money back. You can sell at any time with no recapture fee. The down payment assistance is not taxable It is your money to be used towards down payment, closing costs, or any other fees directly associated with buying the home. This sounds too good to be true but is exactly how the program works.
Only 3% Down
The loan program only requires 3% down, plus the entire down payment and a portion of the closing costs can come from the down payment assistance. You can also ask the seller to cover any remaining closing costs up to 3% of the purchase price, meaning you can actually buy a home with no minimum investment from yourself.
No Catches
You do NOT need to be a first-time homebuyer. All loans are 30 year fixed, with no prepayment penalties or down payment assistance recapture.
No Pay Stubs
You can close up to 60 days before you start your residency with your Match letter with some lending institutions.
They Treat Your Student Loans Fairly
It is possible to qualify even with large student loans because the underwriters only consider your Income-Driven Repayment amounts, which means most residents will qualify for a decent home in these areas.
Cons of a Downpayment Assistance Program
Higher Interest Rate
These loans do not have the best interest rates. Rates are actually set by each agency, which varies by county and has nothing to do with a lender's margin.
Higher Closing Costs
Closing costs are a little higher – roughly 3% of the purchase price of the home.
It's Not a PMI-free Doctor Loan
These loans may have monthly private mortgage insurance – however, the mortgage insurance is at a significantly lower factor than traditional conventional or FHA loans. The private mortgage insurance costs on these loans are roughly half the cost of an FHA loan.
Your Spouse Better Not Make Much
There are income limits. They vary by county, but one I recently looked at was $88,350. Most residents and fellows will not have a problem with this, but it could be an issue if you wanted to use a spouse’s income to qualify and combined your income exceeded the county limit.
Where Are These Programs Available?
These are the areas and institutions within the area we’ve verified funds are currently available:
Arizona
Phoenix & County of Maricopa
- Abrazo Central Campus-AZ Phoenix
- HonorHealth-AZ Scottsdale
- Maricopa Med Ctr-AZ Phoenix
- Mayo Clinic School of Grad Med Educ-AZ Scottsdale
- Phoenix Children's Hospital-AZ Phoenix
- St Josephs Hospital-AZ Phoenix
- U Arizona COM-Phoenix
Tucson Pima County
- Tucson Hospitals Med Ed-AZ
- U Arizona COM at South Campus Tucson
Colorado
Denver County
- Colorado Health Foundation Denver
- Denver Health Med Ctr-CO
- HealthONE-CO Denver
- St Joseph Hospital SCL Health-CO Denver
El Paso County
- Penrose Hospital-CO Colorado Springs
Florida
Escambia County (Pensacola and Century)
Hillsborough County (Tampa)
- U South Florida Morsani COM-Tampa
Pinellas County (Clearwater, Gulfport, St Petersburg, Largo)
- Bayfront Med Ctr
- Johns Hopkins All Children's Hosp
- Largo Medical Center
Lee County (Fort Meyers)
Manatee County (Bradenton)
- Blake Medical Center
Nevada
Clark County
- MountainView Hospital Las Vegas
- U Nevada Affil Hosps-Las Vegas
- U Nevada SOM-Reno – Las Vegas
Texas
South East Texas Housing
City of Baytown
City of Pasadena
Walker County
Legal Stuff- Eligibility subject to program stipulations, qualifying factors, applicable income and debt-to-income (DTI) restrictions, and property limits. Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Copyright©2017 Fairway Independent Mortgage Corporation. NMLS#2289. 4801 S. Biltmore Lane, Madison, WI 53718, 1-877-699-0353. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Lender. Licensed Nevada Mortgage Lender. TX Location: 1800 Golden Trail, Carrollton, TX 75010. AZ License #BK-0904162. Josh Mettle NMLS #219996 Fairway Independent Mortgage Corporation. NMLS#2289. 4801 S. Biltmore Lane, Madison, WI 53718, 1-877-699-0353. Other restrictions and limitations may apply. Equal Housing Lender. Disclosures
What do you think? Would the ability to get $10-20K of free money entice you to buy a home in residency when you would otherwise rent? Why or why not? Have you used one of these programs? How did it work out for you? Comment below!
It is good for folks to know about. I had no interest in dealing with the hassles of homeownership as a busy resident. I was in a four-year residency and unlikely to stay in that town. I was single with no kids. This wouldn’t have changed that decision for me. I could imagine circumstances where it might make sense.
Great option to be aware of for sure!
With new refinancing programs now available where you can refinance in residency to a low monthly payment ($100 or so), is this an option to lower the monthly payment your underwriter sees you paying? Or will they still simply look at the total med school debt you are footing?
It seems like they should be considering what your actual monthly payment is and now what your total debt is to figure out if you can afford the monthly mortgage.
Really good idea to consider, particularly when there aren’t a bunch as a resident. I was lucky enough to get a loan while a med student and refinanced with a physician loan at start of residency (in same place) on a reasonable 120k house. Not sure how big of a bang for your buck you’d get on the price of home a resident should be looking at to prevent further accrual of debt and prevent them from more savings.
I had never even heard of this as an option (granted I never lived in any of the counties mentioned). Very interesting, though the PMI and higher interest make this less appealing. I would assume a physician mortgage may still be a better deal, though also typically with higher interest then a conventional loan.
This doesn’t effect my recommendation that no resident should buy a house. There are many reasons for this and I discussed them in the book The Doctors Guide to Starting Your Practice Right. Rent until you are no longer transient and are sure you are staying somewhere. There is a season for everything. A time to rent and a time to buy. Residency is a time to rent.
Dr. Cory S. Fawcett
Prescription for Financial Success
I bought a home during residency in Raleigh/Durham area. Lived in it 3 years, rented it a year to a fellow resident while I did a fellowship in South Carolina, then sold it for a 20% profit when I moved to the midwest. Definitely worth it for me. While I was in Charleston, SC, for that year, we looked at buying a home but couldn’t afford 2 mortgages. It was the hottest real estate market at the time, and I would have made out very well had I been able to afford it. It can be done in the right situation with a healthy real estate market.
Sure, if your home doubles in value, buying works out great. Talk to some residents that bought in 2006 for the opposite perspective. As long as your crystal ball works, it’s an easy decision.
If you are talking about single residents ok yeah rent till you are an attending. For a resident with 2 kids and a stay at home spouse and no student debt the physician loan looks very enticing. Renting hardly gets you anything with 3 bedrooms or its in a terrible area. I’ve been very happy with the 10/1 arm offered to us with 0 down. It let me keep our sizable savings invested instead of tied up in home equity.
The reason for residents not buying a home isn’t about how nice the living accommodations are or which is cheeper. The reason is they face a substantial risk of loosing a lot of money and having big head aches. They are transient and will be leaving the area in just a few years. If the market is down or sales are slow at the time their residency ends, they could loose a lot of money. It’s a risk they don’t need to take just for “better” living space for a short stent.
If you know you are transient, then rent. If you think you are permanent, then buy. When transients buy, the risk is too high.
Dr. Cory S. Fawcett
Prescription for Financial Success
I sincerely hope it works out well for you. It does not for many residents.
JE
If you made a 20% profit in 4 years you are very fortunate. It is very rare for anyone to make a profit on their house in that amount of time.
Most people only look at the price they paid and the price they sold for and call that profit. If you buy a house for $100,000 and sell it for $120,000 they are calling that a 20% profit. But that is not the case. To calculate the profit you must add up all the expenses and subtract that from the check you got at closing.
For example you can start with the check you got at closing and subtract from that your expenses which include the down payment you originally made, all the mortgage payments you made for four years, all the insurance payments you made, all the property taxes you paid, all the repairs you made, all the yard upkeep expenses, and costs of improvements or remodeling you did, and all the closing costs of buying the first house, such as the appraisal, loan origination fees, points, and other fees for the transaction (the closing costs of the selling are already reflected in your proceeds check from the sale). In your case you rented it for a year so you can add back any rent payments you received.
This will give you the dollar amount of the profit or loss you had. In only four years, this is likely to be a loss.
I recently had a resident I was talking with tell me he owned his house for 2 years and made a 20% profit. I asked to see everything as I would love to have an example of someone making a profit from such a short ownership. When we calculated the profit, there wasn’t any.
This is a problem. Many people think they make a profit, but in fact they don’t. They use that false information to make a future decision. It is a lot like the people who think they got a tax deduction for their home mortgage interest, but in fact they did not. It is better to go ahead based on true information rather than a false assumption.
I challenge you to go and look at all the expenses and income from the deal so you know exactly what the transaction cost you. You might be thinking you made 20% but in fact you might have lost money on the deal.
Best of luck.
Dr. Cory S. Fawcett
Prescription for Financial Success
Exactly. I bought my first house for $80K, sold it for $83K and lost thousands.
Cory,
I agree that you have to deduct all of your expenses but it’s not a fair comparison to renting if you deduct all of your mortgage payments. I felt like in the midwest city I was in that my mortgage payment of $1100 a month was much less than anything I could rent of similar size. In fact, was only a few hundred dollars more than our 2 bedroom apartment and that was for a 4 bedroom house. Did we come out ahead taking everything you said into account? No probably not. But did we get a better place than we would have for similar money? Absolutely.
Docben86
My comments had nothing to do with comparing buying a house to renting, that is an entirely different subject and brings in some other things to calculate. I covered that topic in my book and residents seldom come out ahead on that calculation. They are almost always better off renting since renting is for short term and buying is for long term (in general).
My comments here were only about deciding if a profit was made in buying and selling a house.
Dr. Cory S. Fawcett
Prescription for Financial Success
You were in a city where there were no 4 bedroom houses for rent?
You don’t have to make a “Profit” to come out ahead on a home vs renting. You can often get a bigger space in a better area with a better commute vs renting. Homes we live in are luxury purchases not investments so each resident needs to make the choice on what they value more.
Sounds like a pretty good option if you were considering buying anyways! Would you be able to refinance the mortgage later to lower rates with no PMI? If so, I could see this being a good starter home and eventual rental if you were planning on staying in the area. The thing that keeps me from buying is just not knowing where my wife and I will eventually end up.
I’m in the “residents should not buy a home” camp, but I wonder how something like this would compare to using a VA loan for a military resident who wanted to buy a home. Any thoughts?
I don’t think I’d take a VA loan over a doctor loan.
I believe it is critical to good decision making to know as many options available to apply the correct one for your situation.
While Down-Payment assistance programs have their place in the marketplace, I do not see the advantage to them over a True Physician/Doctor Mortgage.
A True Doctor Mortgage allows a Physician to Purchase a Home with 0% down (no need for Down-Payment Assistance – NO Down Payment). Plus, the Rates offered are just as Good as a person (that is not a Doctor) putting 20% down, and the Doctor Mortgage (besides No Down-Payment) has NO Mortgage Insurance.
[Promotional comment edited.]
Hey Kent, imagine you went to the trouble to write a piece like this, not only to educate folks but also to get a little more visibility for your business, and then waited 4 months for it to be published. Then one of your competitors left a comment on it asking readers to call or email him leaving his email and phone number. And 3/4 of the comment was about the competitor rather than the post. How would that make you feel?
As a general rule, try to keep your comments a little less self-promotional, particularly when it is a guest post written by one of your competitors.
Jim,
There is a lot of mis-information on Doctor Mortgages.
This is not a plug.
I worked at a number of Banks – all have plus and minuses – that offer Doctor Mortgages.
The good ones offer Highly Competitive Rates at 100% (Zero Down – No MI) without a lot of costs to originate the Mortgage.
I wouldn’t say a thing, but no one responded to #3 comment – telling him or her that Doctor Mortgage Rates are not higher than Conventional.
I have seen Doctors with previous Homes that they still own as Rentals – get Approve for a New Purchase with a Doctor Mortgage (New Home is their Primary Residence.)
No one had mentioned turning your Purchase from Residency into a Rental, but it happens. You do not need to sell your property right after Residency – obviously it is not for everyone, but is an option.
When I’ve checked, I usually find that the best doctor mortgage interest rates are slightly higher than the best conventional loan interest rates, so I think that’s a fair statement.
I agree that I see many people turn residency homes into rentals, sometimes voluntarily, sometimes not. In general, it doesn’t end well because the home wasn’t bought as a rental in the first place. Besides, buying a rental property at “full MLS price” with 0% down is a great way to be cash flow negative for a long, long time. So yes, it’s an option, but usually not a good one, especially when you take into account the long distance landlording costs.
Why do these down payment assistance programs exist in these particular counties?
I’ve only heard about them for people with low income well below what a resident earns.
wish I had known about these while I was in residency in colorado and then fellowship in phoenix! could have bought a house in denver in 2011! probably wouldn’t have moved to phoenix if i did that…
Lack of inventory and the fear of a potential housing market crash mean there are two big questions on every home seller’s mind:
“If I sell my home, where will I go?”
“What if I buy a new home with a high price tag and lose all the value in a few years?”
We want to help you solve these problems and be confident that you can sell your home and purchase a new one successfully in today’s market.
Please join us on Friday, February 18th at 2:30PM MST for a Facebook live event with Josh Mettle, Founder and Division President of NEO Home Loans, and Jake Breen, Managing Broker of Berkshire Hathaway Utah Properties. We’ll be sharing strategies to help home sellers succeed in selling their current home and transitioning to a new home, in spite of high competition and low inventory.
You can learn more about the event and RSVP at: https://form.jotform.com/211746258148056