Considering a 10% down vs. doctor's mortgage

[Allixi]

Hey all,

I'm planning to buy a house in the next year. I'm not especially enthusiastic about the process, but the wife and family are pushing me pretty hard. We currently live in a condo I bought 3 years ago that's in a good location and works well for the two of us, but would be too small if we had a baby, which we do want ASAP. It's especially important to my wife that we move into a house BEFORE a baby is born, so this is somewhat a case of "happy wife happy life".

After looking at houses in my city I wanted to limit the price to ~500K, which would be 2.5x gross income for me.

Some other factors to consider:
1) I have ~180K of student loan debt I want to pay off within 4-5 years. This would certainly strain my debt-to-income ratio in getting a conventional mortgage and I'd prioritize paying this off over saving for a large down payment.
2) Neither of us want to have to move again to get into a better school district, so we're looking at potentially staying up to 20 years in a house. Variable rates are probably not feasible.
3) I already max out a 401K, 2x backdoor roth IRAs, and am putting a little bit into a 529 for my wife (she may go for further schooling).

Realistically, I'd have to save for another 4-5 years for a 20% down payment which could be as high as $100K. My options seem to be:

1) Get a mortgage with 10% down. I just tried to apply for a HELOC for this and the bank appraisal was a lot lower than what I was expecting (almost $20K lower than the Zestimate). I could probably extract only $20-25K of home equity with some extra work.
2) Get a doctor's mortgage - I have sent out some inquiries already to get a sense of payments/rates/fees

Any suggestions? Is getting a 10% down and paying PMI for a few years much more advantageous than a doctor's mortgage? Is it much more difficult to refinance a doctor's mortgage down the road?

Thanks in advance!

[PhysicianOnFIRE]

You may have to look at specific loan terms, but I believe the PMI is often waived for a doctor's loan.

How long have you been in your current job? Just a friendly reminder that about half of all docs leave their first job within two years. That may or may not apply to you.

Best,

-PoF

[The White Coat Investor]

I think student loans are a higher priority for your money than a down payment, so I think it's a reasonable use for a doctor's mortgage. I consider a 10% down mortgage a doctor's mortgage though, since you need 20% down to go conventional.

Either way, don't pay PMI. Either put 20% down and avoid PMI, or get a doctor's mortgage and avoid PMI.

However, I wouldn't be in a huge rush with this. I mean, you're AT LEAST 9 months away from a kid. You can make a lot of financial progress in 9 months if you're living like a resident. That might mean paying off most of those loans or even saving up a downpayment. Plus if you have some trouble getting pregnant, maybe you're out of debt by the time you really need the new house.

[Curbside Real Estate]

A doctor's mortgage or physician home loan is essentially a lower down payment loan available to you because you're a physician. The benefits are that you typically do not have to pay Private Mortgage Insurance (PMI) (while receiving the same rate as you would for any other 10% downpayment loan) and you might have an easier time qualifying considering your student loans.

IF you decide it's the right time to buy a home and are considering putting down less than 10%, go for a doctor loan. Depending on where you live, you should have multiple options available to you and PLEASE shop around! You'll find the rates comparable if not better for the physician loans.

[conniebird]

Define too small. Personally I'd try to stick out longer and save more. Buying too much house is a mistake a lot of residents/attendings make. We live in a 730 sq ft X 2 bedroom apt in HCOL. It's big enough for us and a baby.

[Zaphod]

If you run the calculations out for down payment vs. PMI vs. doctors loan I suspect they will come out basically the same, what will change is where you pay and when.

For a doctors loan you usually pay the pmi in the form of a higher interest rate or overall loan costs. For pmi you pay monthly and it goes down over time. For a down payment you are basically prepaying it. There may be some deduction advantages and cash flow advantages you will want to consider in your pros/cons.

I've done it all ways. For residency I did one of those zero down doctors loans, what a ginormous mistake (it was also 2006).

For my now rental property I put down 10% and they made it a "jumbo" with PMI rolled into the rate so it would always be deductible, rate was still only 3.625.

For my new house I put down 5% and will pay PMI, though I got a 2.5% price reduction helping the LTV and think overall I got a great deal so expect to be able to drop PMI a few years early. Rate is 3.375%.

Just using Zillows calculator a 20% down 500k house (so 100k) would be 2346/month in payment.

For the 0 down option it is 3197, the portion of PMI being 408/month.

You can see the monthly difference is 851/month. If you had zero appreciation until PMI dropped and didnt overpay, reappraise, etc....you will have paid 102.9K total extra over the time period. So, its about exactly the same if you dont account for inflation which would make it less. All likelihood a small over payment and reappraisal around 5 years and it could be dropped anyway, being quite net positive.

I am not suggesting a 0 down home though, just illustrating that the cost is basically the same it just looks different. 0 down homes are really negative down with the transaction costs added in so are far too dangerous and not worth it. However, I dont see the rationale of having to wait until 20% down since appreciation will cause that to go up over time (one hopes of course) and youre basically paying the down payment while being in the house.

[Allixi]

The White Coat Investor wrote:

I think student loans are a higher priority for your money than a down payment, so I think it’s a reasonable use for a doctor’s mortgage. I consider a 10% down mortgage a doctor’s mortgage though, since you need 20% down to go conventional.

Either way, don’t pay PMI. Either put 20% down and avoid PMI, or get a doctor’s mortgage and avoid PMI.

However, I wouldn’t be in a huge rush with this. I mean, you’re AT LEAST 9 months away from a kid. You can make a lot of financial progress in 9 months if you’re living like a resident. That might mean paying off most of those loans or even saving up a downpayment. Plus if you have some trouble getting pregnant, maybe you’re out of debt by the time you really need the new house.

Click to expand...

Well, we're not pregnant yet, but if it did happen it would start the clock, so to speak, so I wanted to start asking these questions ahead of time.

conniebird wrote:

Define too small. Personally I’d try to stick out longer and save more. Buying too much house is a mistake a lot of residents/attendings make. We live in a 730 sq ft X 2 bedroom apt in HCOL. It’s big enough for us and a baby.

Click to expand...

918 sq ft, 2 bedrooms, 1 bathroom. There's a cultural thing which I don't fully get, but my family will insist on, where a caregiver (either one of our parents or someone we hire) stays with the mother and does things for her for 1-3 months peripartum. The condo definitely isn't big enough for 3 adults, but now that I think about it, it's probably more prudent to rent a place close by than to move ourselves.

[WealthyDoc]

In the millionaire next door they recommended that if you ever want to become wealthy don't get a mortgage more than 2x your income.  I don't know what you should do but I will share my story:  I have never bought a house anywhere near that amount.  I wouldn't buy a house if I'm broke personally.  It is a luxury expense in my mind.  I paid off my debt in two years while renting an apartment.  Then moved to a rental house.  Then bought a modest house with 20% down.  Now I can buy most any house I want with cash because I made good choices early on.

[DNMTG]

Generally every additional $1000 towards a down payment adds about $5 a month in your mortgage on a 30 year term. I think it would be more advantageous for you to go with a doctor loan if you aren't putting down at least 20% down on a conventional mortgage as to avoid PMI.