This episode of the Finance Flash Go! podcast covers physician mortgages.
Let’s start with basics. A mortgage is a loan from the bank. Various mortgage products are available. Most require a fairly significant down payment, anywhere from 3.5% for FHA loans to 25%. Many physicians do not have this kind of lump sum money sitting around to afford a mortgage right out of training. This obviously represents one of the reasons that renting your home right out of training is a much safer bet in general.
But physicians make a lot of money. And banks know that. And banks are not in the business of losing potential high income clients.
So, they created physician’s loans which are loan products that are offered to those with a high future income as documented by a signed contract or recent pay stubs. These products in general require a lower amount of money down (usually from 0-5%). The advantage of this for you is that less money is required up front. But the downside is that you have little to no equity in the house in the beginning. If you can’t make payments and/or need to sell, you are in big trouble.
So, banks are the good guys?
Don’t be mistaken. Banks are not doing this because they are nice and feel for the plight of the doctor. They will tell you that you can afford a huge amount of house, way more than would be financially responsible. And they will tell you they can give it to you for little to no money down. Don’t fall for the trap.
If you are going to use this product, use it to your advantage! For example, I got a house that was much less than 2x my income. I got it with 0% down and used the money that I saved in down payment to buy a cash flow rental property as an asset. Putting equity into your home to pay off a mortgage or lessen the amount of mortgage is a smart move. If you are not doing this, I highly recommend using that money as an investment and not spending it to appease lifestyle creep.
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