One of the nice things about the changes over the last decade or so in the publishing industry is that niche books which previously wouldn't have had a large enough audience (and thus enough profit) for a traditional publisher to publish can now be published. That's a win for authors and readers alike. Any financial book directed at physicians is by definition a niche book since physicians only make up something like 0.3% of the US population. The book I'm reviewing today, Why Physician Home Loans Fail by WCI advertiser Josh Mettle (that's his ad above this paragraph so we have an obvious conflict of interest, plus he gave me a great deal on a refinance a couple of years ago), is a niche within a niche. The book is extremely useful for those it is aimed at- doctors who will be buying a home within the next year, especially if they plan to use a “doctor mortgage loan.”
The Awesome Foreword
Josh Mettle, author
Josh came to me a couple of months before publication and asked me to write the foreword. In my foreword, I explained what regular blog readers already know- that when doctors exchange their scrubs for a business suit and step into the financial world, they are at a severe disadvantage. Although home ownership can be wonderful, both personally and financially, it's important to do it at the right stage of life for it to work out well. I have mixed feelings about “doctor mortgages.” In some respects they're wonderful in that they allow doctors to buy a home they can clearly afford despite not meeting traditional underwriting criteria. They also allow a doctor to use his income to fund retirement accounts or pay down high interest student loans instead of funding a down payment. However, they also often enable doctors to buy homes long before they really should (like residency.)
Summary of the Book
Mr. Mettle sees two big problems with doctors getting mortgages that he outlines in his introduction:
- Most loan officers have precious little experience working with the unique financial situation of a physician &
- Most physician financial situations are far more complicated than most doctors realize.
He also lifts the hood about the main reason that doctors run into issues with their mortgages- loan officers are trained and incentivized to say “Yes!” while underwriters are trained and incentivized to say “No!” Josh also, at my urging, added a great chapter on the rent vs buy conundrum. Josh, as a real estate professional and investor, is very pro-real estate as you might imagine. This chapter, however, adds balance to the book and provides warnings and examples of physicians who bought too much house.
Josh includes a chapter on getting all your ducks in a row BEFORE hiring a realtor, and an entire chapter on physician mortgage loans, and their pluses and minuses. This is an important read. Many doctors I interact with don't realize that a doctor-specific mortgage loan COSTS MORE than a conventional one. No free lunches. He does a great job explaining the interaction between points, fees, and interest rates.
The next three chapters deal with common home buying situations for physicians- the graduating medical student, the graduating resident, and the self-employed (1099) physician. If you fit one of these categories, the applicable chapter alone is worth the price of the book. The book finishes with a chapter about the closing, a chapter about common mistakes physicians make, and a summary chapter, followed by an appendix that contains typical mortgage loan paperwork.
Strengths of the Book
The book is only 124 pages and can easily be read in an hour or two. The entire book is physician-specific and is liberally sprinkled with actual, real-life horror stories that happened to doctors buying homes. You can learn a great deal from the mistakes of others.
Weaknesses of the Book
The initial draft of the book I saw was far too pro-home-buying. Between my foreword and Josh's chapter on buy vs rent, I think that's been fixed. The only other complaint I think someone could make is that the book is self-serving to its author. Not only does publishing a book help establish you as an expert in a field, but some might say all the horror stories in the book are included to subtly entice the reader to seek out a real expert on physician home loans when they might not need one. I have no doubt that part of the reason for writing a book like this is to increase his business. That's hardly a sin. The fact remains that it is the only book in this niche within a niche, so I guess Josh is THE expert on the subject at this point. And it's not like you're choosing between using a loan officer and not using a loan officer when you get a mortgage. You might as well get one who works regularly with people in your situation.
Pearls Before Doctors
A few pearls from the book to give you a taste of it:
I can name a half-dozen physician clients and friends who have taken six-figure losses and two who have taken seven-figure losses, buying right at the top of the market, before the real estate and mortgage meltdown of 2006-2007. That's a pretty big hole to dig yourself out of, regardless of your income bracket.
I advise my clients that pre-qualifying is just not enough and I recommend they obtain a full credit and income approval prior to falling in love with a home and writing an offer.
Traditionally, a physician home loan is a portfolio loan product, meaning that the bank or institution that is making the loan is actually going to keep the loan and retain the servicing of the loan. Since the bank is keeping the loan, it can make judgment calls in underwriting and assessing risk and can, therefore, take a more liberal approach with physicians than it would for other people, because it deems physicians less likely to default on the loan.
It's important to recognize whether your loan is a slam dunk that anyone can handle with their eyes closed, or if it has some additional complexity, such as relocation, closing with a contract before you have pay stubs, student loans going in or out of deferment, IBR, jumbo loan amount, or complicated employment situations.
Free Books!
Josh was gracious enough to provide me a review copy, as well as three signed copies of the book to give away to you. [Update: The drawing is over, sorry for those who didn't win.] If you didn't win, you can always just buy it on Amazon. At the time of this writing, the Kindle Version is $9.99 and the Paperback is $13.11.
Have you used a physician home loan? What problems did you run into? Do you think reading a book like this would have helped you avoid those issues? Comment below!
I remember I could not even contemplate making any big purchase when I was a resident, or even when I was a fellow. It was only in the last 5 years when I became Attending that I finally decided to settle down and look at real estate. Life of an academic physician is akin to life of a military person. You guy where the jobs take you. Each time, I rented with my wife and daughter and was contented if I had any left over for a summer break. After much effort and a lot of patience, a general hospital finally made me the offer I was waiting for 9 years after medical school and 14 years after college.
I’m a strong believer in the philosophy that if you can’t afford to put 20% down and get a 15-year mortage, you can’t afford it. To me, it makes far more sense to rent for a year or two, particularly when starting a new job out of training, to make sure that you will stick with the job as well as to figure out which neighborhoods/schools will work for you. This should be plenty of time save up the down payment. I do concede that this may not work in a high cost of living area, but I avoid those for this very reason.
I think you can’t go wrong with that advise but I also don’t think it applies in all situations either. Physicians have fairly high incomes after residency but are likely to have little in savings (particularly if paying down debt aggressively). They also have a fairly consistent income stream (most could leave one job and start another in a week).
20% down and 15 year mortgage sounds great, but if you have to save up for 5 years and pay 5 years of rent (possibly at higher fees than buying as they are in my market) then you are better off paying 5% down and doing a 20 year loan.
Or do as I did and take a VA loan for about 3% down on a 30 year loan but overpay with a plan to have it paid off in 20.
I very much agree that you can’t use a one size fits all approach. My current home is one where I put down 20% and qualified for a 15 year loan.
But when I was in residency, I bought an inexpensive home on a low money down 30 year loan and broke even. When I first was out in practice, I bought on a 30 year loan and only had enough money to meet the minimum VA loan amount. In both of those situations, I was living in places where quality rental housing in good neighborhoods was in very short supply and was very expensive when you could find it. I realize that this may be unusual, and that most young physicians today probably live in areas where there are plenty of good rentals.
I will add that when I bought my home coming out of residency, I bought small, my monthly mortgage payment was about 5% of my pre-tax monthly income, and I made yearly additional principal payments that basically amounted to my treating it like a 10 year loan. In other words, I could have bought the same house by socking away money for 6 months and doing a traditional 20% down 15 year loan.
The important thing, especially when first coming out of training, is to underbuy rather than overbuy. One can overbuy with a 20% down 15 year loan and one can cautiously underbuy on a low-money down 30 year loan.
That’s an important point.
My family is moving across the country from New York to California. We would like to get a place before home prices increase any more but the only way we could afford a home is through a “doctor loan”. I don’t know if it would be worth taking the time to save a down payment to qualify for a traditional loan while housing prices continue to rise.
I would replace “while” with “if” in that sentence. But you’re right. If prices (or interest rates) go through the roof, it’s better to buy now with a doctor loan than later with a conventional. It may also be better to use your cash to fund retirement accounts or pay down student loans rather than using it for a down payment.
I have a similar thought but with regard to the possibility of rising interest rates on home loans. As we switch from the post-residency year as a W2 to 1099 status in the second year, I’ve wondered whether we should get a physician home loan this year or wait a full two years as a contractor to qualify for a conventional mortgage (for proof of steady income according to our mortgage brokers). 20% down is not a problem but I “fear” the interest rates will be significantly higher if we wait two years for a conventional loan. Maybe I’m just a sucker for news about Fed interest rate hikes.
There are those who think that the housing market out here in CA will keep going up, while others claim that there are signs of it starting to soften, especially in the most overheated markets (e.g. the greater Bay Area). I won’t disagree that interest rates seem to be more likely to go up than anything, but prices continuing to rise over the next year are hardly a given.
Regardless of predictions of where the market is headed in CA, one thing is certain — the type of home that most physicians would want to own is very overpriced in CA compared to where physician compensation is right now in this state.
Which brings one to the most important factors in deciding whether to buy in this high-priced market (and what to buy) — fundamentals like the quality of the position, the likely stability of compensation in that position (not always easy to assess), how likely one is to stay in an area long-term, etc.
If one stays in the house for 10-20 years and if one buys at a price that one is able to continue to service the loan even if one’s compensation is cut in half (and none of us can be sure that this won’t happen to us in the future), then it almost doesn’t matter where prices or interest rates go — certainly in the short run. That is why future price and interest rate predictions are, to my mind’s eye, secondary considerations, especially since they are unknowns. They certainly played a secondary role in my decision on whether to buy (although my perception that the market was still bottomed out when I bought and the very low interest rate did play a role in how much house I bought…
My wife and I were lucky enough to be able to buy a home when we moved to the city where I am doing residency. We were from the area, knew we would be living here for the foreseeable future after residency, plus had 20% down from me serving in the military. Now in the resident lounge there is constant talk among the graduating residents about physician mortgages and buying their first home. Definitely seems like a good read to recommended before being getting drawn into some huge purchases right after residency.
There are several people in my med school class that bought in their first year, though I think their parents helped them out with down payments. I’ll be renting for the foreseeable future due to school, residency, and military payback, but I’m hoping to use that time to save up for a down payment as opposed to using one of these physician home loans.
As a resident I rushed too quickly into buying a house. Though we initially qualified for “doctors loans” the final approval process was a disaster since we not approved by underwriters. It took us 1 year to secure a loan. If I had this knowledge I probably would have done things differently.
I’m about to graduate and buy… This sounds like something I should read carefully. Thanks WCI!
We used a physician loan nearing the end of residency. Seemed to work fine, competitive rates.
If you do your research and you have a good lender, it isn’t a bad deal at all. The key with doctor loans, like anything else, is to know what you’re getting into, ask questions (and ask what questions you SHOULD ask), and make sure you’re educated before you make a choice.
People blame the program, but they never did any research themselves. Kind of silly.
As a newly self-employed physician I have run into several roadblocks while trying to get a mortgage for a new home. I have looked at some of the physician mortgage programs but despite a healthy income have discovered several new underwriting restrictions which resulted from the mortgage fiascos of the last real estate market crash. I think I could use this book for some much-needed guidance.
Amy the trouble you are running into is a serious issue for all self employed or 1099 independent contractor physicians. In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required that for residential mortgages, creditors must make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms.
Translation… Mortgage lenders across the country are scared to death, if they can’t “verify and document” what your income is going to be, the Consumber Financial Protection Bureau can fine them or even unwind the transaction leaving the mortgage lender with a HUGE loss.
This law just went into practice on January 10th, 2014, commonly known as the “ability to repay rule” and is causing a ton of problems for newly 1099 and self employed physicians this year. There are a few banks that can help still, some or less stringent than others. Worst case, once you are on the job for 6 to 12 months you should be fine. Hope that helps!
I have had several physician friends (several fellow residents at the time) who have used doctor loans. Some to great success, others not so much. The ones who did not have great success weren’t great with their personal finances to begin with. Personally, I think if you are good with your own personal finances, doctor loans can be great.
We bought a house with a physician loan during residency. While the purchasing process went smoothly for us, we ended up taking a 5 figure loss when we sold. Also, owning this home definitely contributed to my decision not to do a fellowship. Now as an attending, we are looking at buying again. While I know that we are in a much more appropriate position to be purchasing a house, I still feel a little anxious about it after our last experience.
Hopefully I can knock down a lot of this debt before having to buy a home… Otherwise will need to do some negotiation regarding debt to income and the like. We will have to wait and see how informative this book is. Hopefully this can help explain some of the technicals that go into mortgage underwriting to aim us with some negotiation ammo.
Was considering using the physician loan…just finished residency. However, my husband advised not to until we actually have at least 20% for downpayment
I’d love to be in the drawing for the book!
Right out of residency my wife and I got a physician loan. All went fine, we found a nice house and put in an offer and it was accepted. We went to the closing and found out that there was an 80k balloon payment in 5 years… The guy said nothing about this. It was our first home buying we were so naive. It worked out in the end, my job sucked and didn’t last 3 years. We sold the house at a minor loss. Our next house we bought after finding this site and its resources. We put 20% down after renting to make sure the job was ok, got a 15 year mortgage @ 2.6%. I will never use a physician loan again, we paid for it…
To be fair, most physician loans don’t involve a balloon payment. I would have walked out of that closing.
In retrospect we should have, but we were coming from out of town all our stuff was in a truck, we didn’t really know what to do, first closing… It was pretty messed up.
1 year out of residency, saving/investing aggressively and still renting. Nevertheless, we’re getting the itch to finally buy and I would hate to use the liquid emergency fund money we have for a down payment. Looking closely at a doc loan as it still seems to be a good option for us.
Sounds like an interesting read. as a new resident, i will definitely be renting for the next few years but would love to learn more about home buying to be as prepared as possible.
We bought using a Physician loan in August ’12. We used BBVA compass and 5% down and 4.375%/30 year, the whole process was very smooth and we closed on time. Although we had the 20% down, we felt we the additional 15% was better used in the equity market (luckily we were correct). In addition our home has appreciated to 25% equity now and we plan on refinancing to a 5/1 ARM or 15 year fixed shortly. Love the blog, keep up the fantastic posts!
Got extremely burned by buying in the peak of the market, before the housing crash during residency. Used a physician loan then with 0 down. Now recently just bought a house and used a physician loan again.
I think understanding the terms of any type of loan is critical. I also think it is understandable in many situations to use a physician loan as long as one knows what they are getting into and knows what they can afford. I used a physician loan the second time around because I wanted to put down a little less than 20%, using the remaining cash for home improvements and for paying off student loans (given the differences in rate and tax benefits of my mortgage vs. student loans). But I have a very specific plan to aggressively pay down my mortgage, and I bought a house well within my means. I think the chapter on the rent vs buy decision must be excellent, especially for the new resident and new attending.
This book likely has some very good information, but I would like to see evidence that “physician loans always cost more than a traditional loan.” I graduated fellowship 2 years ago, then chose to rent to make sure the job and schools were right. They are. We love the schools, and I have signed a 7 year contract with my employer.
So now it is time to buy a home. I have 10% to put down, but saving another 10% would take almost a year and severely limit my ability to fund savings, retirement, etc. Given the current market conditions, most would predict that home prices in that time will increase, as will interest rates. With 10% down on a physicians loan I will have a 4.125% rate on a 30yr fixed, certainly competitive with traditional mortgages. That’s no points and no PMI.
Frankly, this is a very easy decision for me. If I waited to save 20% I would be paying more for the same house and pay more in interest with a higher rate over the life of the loan. And no, I am not letting the lender talk me into a bigger loan or more house. My DTI is approximately 17%.
A very real possibility. I took a new job when leaving the military. Moved to my hometown. We decided to build/buy new right away as I knew I wanted to settle there and our rate is 3.5%. A similar loan would run us 4.2% now and they same model home is selling for $50,000 more less than 2 years later.
Of course I probably should never use the words “always” and “never.” But as a general rule, if you’re putting less down, you’re going to pay more for the loan. It might be in points, it might be in interest rate, and it might be in fees, but you’re almost surely paying somewhere for the fact that the lender is taking on a little more risk lending to you. The going rate right now on Amerisave for a 30 year fixed conventional with no points and no fees is about 4.125%. So if you’re truly paying no fees and no points, then you’re right that you’re getting a very good deal by not having to put 20% down or pay PMI.
There are closing fees. No points, but there are fees. And yes, since I am financing 90%, I am in fact paying more in interest than if I had put down the traditional 20%. Nonetheless, I’m confident in my other assumptions. Home sales are heating up, and so will interest rates.
Just bought a house but did a conventional loan; considered the physician loan, but ended up not using it, since I would have paid much more over the long-term; as the article said…there are no free lunches. Having said that, I can see situations where it could be useful, especially for graduating residents, attendings at the beginnings of their career.
My wife and I are about a year away from trying to buy our first home. I am finishing fellowship and want to see how the new job goes for at least six months before entering the real estate market. We are doing a fair job of saving, but getting a 20% down payment together given the home prices in Washington DC is very difficult. Will be interested to read more about the perils of the physician loan!
This book would be a good read. I’m at least a few years away from when I would want to purchase a home (currently in residency with significant other in a different state due to job), but it would be good to get some information about the process prior to that point.
I would be very interested in the drawing. My wife is a year out from graduating medical schools and we will most likely be moving for residency. We have a lot of homework to do considering if we should use my remaining VA home loan eligibility or pursue a doctors mortgage.
VA loans aren’t particularly attractive. A doctor loan will probably be at least that good.
Curious what your thoughts are on this? While a VA loan has a fee, its less than PMI would be for those paying less than 20% and it just about guarantees you the lowest available rate as well. I don’t think the VA loan is the best available but I don’t see how a doctors loan is any better. Educate me.
Beau it really depends on how long you are going to keep the home/VA loan. The VA funding fee is between 3.3 and 2.15% (unless you have any VA dissability, then it is waived). If you get a VA loan at 4.25% rate and you pay a 3.3% funding fee, and you only keep your home for 3 years, then your total cost is 5.35% per year (not to mention closing costs).
A physician loan is definately better than that.
But if you keep the loan for 10 years, then you get the 4.25% rate and 3.3% spread over 10 years, your effective rate is more like 4.58% over 10 years, that’s not too bad for zero down, low closing costs and a fixed rate.
I think you should just compare the two when you are ready to buy, analyze the funding fee over number of years you plan on keepping the home as compared to the total cost on the physician loan.
This sounds like a really interesting book. I have a lot to learn in this area! We had a doctor’s loan that ended up working out well for us in residency, but more because we got lucky in the market. Now we need to figure out how to handle a larger mortgage. Thanks for all of the information you post!