Mortgages for Debt-Strapped Med School Grads
Recent graduates of medical school have the world at their feet — equipped with the skills to succeed in a profession that typically comes with a sizable salary. Last year over 18,000 students graduated from medical schools, and most had student loan debt averaging $180,000. Nonetheless, after nearly a decade of higher education, many of those recently crowned with a prescription pad and a stethoscope are ready to reach for the American dream by buying a home. Here’s a primer on mortgages for new doctors.
Know your options
When it comes to buying a first home, there are two standard options: a loan backed by the Federal Housing Administration, or FHA, and a conventional mortgage. FHA loans generally allow down payments as low as 3.5% of the purchase price and provide more affordable rates, although borrowers must pay for mortgage insurance. A conventional mortgage can mean a required 20% down payment, which can be a tough pill to swallow for a recent graduate who may not have much savings. Plus, to secure a good rate for either of these loans, borrowers must have a decent credit score, a barrier for anyone saddled with debt, as med school grads commonly are.
There is another option, however. Many lenders have started offering mortgages designed specifically to meet the needs of rising medical professionals. Howard Cagle, Assistant Vice President of Real Estate Loans at Capitol Bank says that they “find many recent graduates want to purchase a new home near a future employer instead of waiting to verify income from paystubs after relocating to a new hospital or clinic.” For recent med school grads, this can certainly pose a challenge. That’s why these unique loans, available at financial institutions such as Capitol Bank, can be particularly beneficial.
Doctor’s or physician’s loans typically require less money down than traditional mortgages, and they generally don’t force borrowers who put less than 20% down to pay for private mortgage insurance, or PMI. For most homebuyers, lenders insist on PMI when the down payment is under 20%, which can add hundreds of dollars a month to the cost. So no PMI can be a huge asset.
With doctor’s loans, lenders may also adjust their debt-to-income formula to reduce the impact of student debt for new med-school grads, which can make qualifying for the loan easier. Also, providers of physician mortgages will generally accept an employment contract as evidence of the borrower’s ability to pay, as opposed to things like tax returns and pay stubs, which are usually required from a mortgage applicant.
Is it the right time to buy?
Even if you can secure a loan, now might not be the right time for you to buy. It’s a big decision. Spend some time comparing the costs between renting and buying to know how long it will take you to break even on the investment. If you anticipate moving after residency, it may be worthwhile to wait a few years, building up a healthy down payment or a fund for home maintenance costs.
Cait Klein, NerdWallet
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