By Justin Havre
Several years ago, banks and mortgage lenders began targeting doctors who recently graduated from medical school or residency for special home mortgages called a “physician’s mortgage loan” or doctor’s mortgage. These loans look past the student loans and the low first-year salaries so new doctors can buy a home and not have to rent during their first few years on the job.
Homeownership certainly has its upsides, namely the ability to build equity instead of putting money toward rent. With all of this in mind, however, people in this scenario should strongly consider the potential downsides of purchasing a home. Renting vs owning is often painted as a black and white issue, but there are many shades of gray depending on one’s financial situation.
If you are a new medical professional weighing the pros and cons of an offering like this, consider the following:
Waiting Can Mean More Favorable Financing Terms
With 16,000 new doctors entering the medical field every year, it’s a big market for banks and mortgage lenders to tap. Physicians often graduate with a great deal of debt and little cash for a down payment, but lenders are usually willing to have special mortgage considerations for doctors, as the chances of a home loan default are just .2%. Physician mortgage loans seem like a good idea for lenders—but are they a good idea for recent graduates? It depends.
It’s understandable that recent medical graduates would be eager to buy their first home. New medical professionals have worked hard for quite some time and might want to start building equity as soon as possible, which is certainly a great mindset to have. But if recent graduates wait a few years until their debt levels decrease and their income rises, these doctors can greatly increase their options for mortgage lending. Mortgage products such as conventional loans, jumbo loans, FHA loans and VA loans might all become available to them. These mortgage lending products offer many choices in interest rates, down payments, term lengths, and other potential options that a physician mortgage loan may not, translating to potentially tens of thousands in savings over time.
It Usually Takes 3-5 Years to Break Even on a Home Purchase
Another reason recent medical graduates should think twice before buying a home is that medical professionals often don’t stay in their first home for much longer than five years. They either choose to sell to move to a different area to further their career, or they choose to upgrade their home to accommodate a growing household.
Most real estate professionals advise to not purchase a home unless the homeowner plans to live in the home for at least 3 to 5 years to recoup their investment (assuming the market does not dip just before attempting to sell). If a doctor does decide to move and sell their home after only a year or two after purchase, they may actually lose money on the home purchase. As many new home sellers discover, the costs of selling a home usually fall on the home seller, not the home buyer. Additionally, mortgage payments—at least in the first few years—go mostly toward interest on the mortgage loan, not to the loan balance or principal.
Home Maintenance Can Be Expensive and Time Consuming for Busy Professionals
Home maintenance isn’t just for those that have purchased older homes. No matter the age or condition of the home, things break or need regular maintenance from time to time. In addition to regular landscape maintenance, if a single family home is purchased, a new homeowner may have to concern themselves with gutter cleaning, tree trimming, and snow removal. Even in a condo, a homeowner may need to maintain the appliances, the HVAC system, the interior wall conditions, and flooring maintenance.
Most homeowners spend about 1% of the total cost of the home on maintenance, which can add up after a few years. Certain items may be covered by a home warranty or by insurance, but most of it will likely need to be paid out of pocket. This is especially true for those with insurance policies with hefty deductibles.
In addition to the cost of repairs and maintenance, most newly graduated medical professionals might not have the time nor the energy for regular home repairs. Rumor has it that medical professionals work a fair amount of hours.
Buying and Selling Costs: “Hidden” Profitability Killers
When buying a home, most people aim to make a profit or at least break even whenever they sell. The costs to buy and sell a home come with a variety of fees that are not always readily apparent to a new home buyer. Even seasoned real estate investors can be surprised at just how much closing costs and marketing charges can vary from neighborhood to neighborhood. Closing costs can total anywhere between 1 and 5% of the total price of the home. Potential new homeowners should investigate the average costs in their area before deciding to buy. Consulting with a real estate agent or local financial planner can make it easier to understand the potential costs beyond the home itself.
Renting is Just Easier
As a general rule, there’s little doubt that renting is easier than buying a home. Renters don’t have to worry about property taxes, regular home maintenance, or if a water pipe may burst. They only need to pay their rent every month. And while new doctors may be able to absorb the expense of a mortgage, they will have less to worry about should they decide to rent for a few years.
Recent medical graduates should answer the following questions before contacting a mortgage lender for a home loan:
- How long do I plan to live in the home?
- Is the home I want to buy one I can live and grow in for many years?
- How much time and money do I want to devote to home maintenance and lawn care?
- What are the average buying and selling costs in the area?
- Could I get a better loan if I simply wait, save, and build credit for a few years?
With all of this in mind, purchasing real estate can sometimes be a successful endeavor for some recent graduates. However, before new doctors decide to buy a home, they should look at the positives and negatives of not only the mortgage products available to them, but also the the advantages and disadvantages of home ownership.
About the Author
Justin Havre is a Calgary native and owner of Justin Havre & Associates.