A housing and real estate guide for physicians and medical trainees

Choosing where to live is a complicated decision for most individuals, including physicians and medical trainees. The circumstances that inform our housing needs vary greatly from person to person and across the student-resident-attending physician continuum. When you’re looking for housing, decisions abound, including location, roommate or solo, rent or own, short- or long-term occupancy.

While the financial impact of this choice can be complicated, this short guide will hopefully shed some light on the basics of this important decision. Below, we’ll go over important questions to ask, key decisions and basic terminology.

Important questions

What are my needs and wants?
This is a critical distinction to make. Safety, proximity and critical functionality can be seen as needs. Aesthetics, conveniences, quality, etc. are likely on the “wants” list. Sure, there are grey areas along the need/want spectrum, but the point is to resist the temptation to keep up with the Joneses and to create an honest and pragmatic list of needs and wants. Answering this important question before all else will help you resist the internal and external forces that can lead to poor financial decisions.

How much can I afford to spend on housing?
Everyone has unique financial and life circumstances. Thus, everyone has a different housing budget. A resident physician with a stay-at-home husband and three children is in a very different circumstance than a single attending physician with no student loans or dependents. Writing out your monthly and annual expenses will help you define the bucket of money you have to spend on housing. You don’t have to spend it all on housing, but it’s important to understand how much you can spend on housing. The only way to know this is to write down all your fixed and discretionary expenses, then decide how much you want to commit to housing.

Do lenders view me favorably?
One reason understanding how much you can spend on housing is so important is because if you don’t determine this for yourself, others will determine it for you. For physicians, this often leads to poor financial decisions. Lenders will generally view a physician as a good credit risk: High income, stable income and ethical. Access to generous financing can encourage buyers to bite off more than they can (or want to) chew.

Personal characteristics like credit history, existing consumer debt, student loans and other factors contribute to how lenders view you as a credit risk. Talk with several lenders to understand how much money they will lend you, how much they will charge you for the loan (interest and fees), and how much money you need to bring to the table up front (down payment).

Remember: You don’t have to purchase a home for the maximum price that a lender is willing to loan you.

What is the state of the local real estate market?
Liquidity (how quickly can something be sold), supply and demand are important forces to understand in real estate. The process of selling real estate can be lengthy and costly, and can yield unpredictable returns. It is very important to understand the local market before making the decision to purchase real estate—especially if doing so using leverage (financing through loans).

How long will I live in this home?
The ability to sell a property if needed may not be a big issue if you don’t plan to ever move. For most, however, there is specific amount of time we plan to live in a home (or at least a general timeline). This is particularly true for medical students and resident physicians. Career goals change, family plans change, personal desires evolve. The illiquid nature of real estate means it is very important to have a clear timeline when making the decision of where to live and under what financial arrangement.

Key decisions: Rent versus own

Considerations abound here, ranging from financial considerations to personal desires. There are pros and cons to both.

Renting pros: Easier process, typically signing a lease requires much less work than purchasing a home; less money upfront unless using private client banking such as a “physician loan;” not responsible for repairs, easier exit, less headache factor.

Renting cons: No loan pay down and no equity growth as the money all goes to the landlord; no tax benefits; less control, i.e., if you want to fence in your backyard it may not be possible; landlord issues, nonrenewal of lease possible, repairs may not be addressed in a timely fashion or to your liking.

Owning pros: The property is yours. You will build equity as you pay down your loan. Your home value may appreciate over time, which will benefit you financially if you sell the property. There are several tax benefits available to homeowners. You control the home and what is done.

Owning cons: The process of buying a home is more complex than renting a property, and it can be difficult to navigate. Navigating the local market, interest rates and paperwork can be a headache.

Interest rates and inventory: These are the elephant in the living room of real estate. Many may be concerned about purchasing real estate in today’s high-interest-rate environment, but the interest rate is just one aspect of a home purchase. Ultimately, if the payments and numbers fit your budget, the rate is of little significance. Even the debt-adverse Dave Ramsey has said, “Date the rate, marry the house.” You may be able to refinance it later after interest rates drop.

If you use some of the loans detailed below, such as a physicians’ loan, you may be changing your rate in three to 10 years regardless. Inventory is a bit more difficult. If you have decided buying is the right choice for you and your family, you may have to choose a home that is 75% of what you want because of low inventory. Determine what is important to you and buy in an area where you think you can resell. This will give you the option of purchasing a home that better suits your needs in the future.

When considering whether to rent or own, the better financial decision is only one piece of the puzzle. You should also consider the mental stress of taking on financial risk, your personality and your desires.

Loan products

Traditional mortgage: These are typically 20-25% down loans on a 15- or 30-year fixed-rate term.

Physician loan: Many banks offer what is known as a “physician loan.” Except for the VA loan, this is typically the only 0% down payment loan that exists. Many physician loans will finance 100-103% of the purchase. This means in some cases the bank will even include the closing costs in your loan, thus, the upfront money required could be $0. These loans also typically waive mortgage insurance, which can be very costly. Typically, these loans will be a 10/1 ARM, which means the monthly payment is fixed for the first 10 years then adjusts yearly thereafter.

Many bankers will say this is a good option for residents or new physicians who are planning to sell their home within 10 years as they will benefit from a lower initial interest rate and won’t have to pay the adjusted rates that come later. However, this is assuming that the house you purchase will be easy to sell.

The AOA has a partnership with PhysicianLoans, which typically offers physicians who are AOA members home financing with no down payment or private mortgage insurance (PMI). Additionally, AOA members are eligible for a $750 closing cost credit.

First-time homebuyer: These are available to first-time homebuyers and can require as little as 3.5% down, but still require mortgage insurance if the down payment is less than 20%. Typically, these loans are 15- or 30-year fixed-rate terms.

Exit strategy

Start with the end in mind. For homes, this usually means to sell, keep as an investment, or keep for occasional personal use (such as a vacation home). If keeping a home as an investment property, this usually means the home becomes a long-term, medium-term or short-term rental property. All exit plans have their own pros and cons. Important note: If you have lived in a home for two years out of the past five years, you are not required to pay taxes on profits of up to $250,00 for an individual or up to $500,000 for a couple.

For more guidance on money issues, see the AOA’s financial planning resources.

Basic terminology

• Seller’s agent: An agent who represents the seller in the sale of a home. This person lists and markets the home and is paid a commission for the work.
• Buyer’s agent: An agent who represents the buyer in the purchase of a home. This person represents the buyer’s interests in searching for and purchasing a home and is paid a commission for the work.
• Appraisal: Professional and independent valuation assigned to a property by a licensed appraiser. For residential properties, this is usually completed using a comparable sales method.
• Comparable sales: Recently sold properties of similar size, style and location as a subject property that are used by an appraiser to determine the value of a home.
• Private mortgage insurance (PMI): Insurance required by most lenders when the purchase of the home has a down payment of less than 20%.
• Debt to income ratio (DTI): All monthly payments divided by all monthly income. This is an important factor used by lenders when determining how much money they are willing to lend.
• Appreciation: Increase in the value of a property over a period of time.
• Depreciation: Decrease in the value of a property over a period of time. This term is also used to describe an accepted accounting practice that allows real assets (like a house) to decrease in value on paper with significant tax implications.

Related reading:

Taking control of your finances after graduating from med school

4 money tips for medical students and new physicians