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Other ways to get money for your house – Doctor Loans

Posted on July 13, 2016January 30, 2021 by SmartMoneyMD

doctor loans alternative mortgage

This post is the fourth part in the series on mortgages and my experiences:

My local mortgage lender reintroduced me to the notion of getting a doctor loan. I had heard about these options from financially savvy doctors back in residency, but I never really learned whether these loans were actually prudent options. In general, the perks are as follows:

Option to put down less than 20% of the purchase price of your home without having to buy private mortgage insurance. I would estimate that this would save you about $1,000 – $3,000 a year.
Ability to borrow up to 95% of the purchase price of your home. This means that you’d only have to put down $50,000 for a $1 million home!
Approval of loan with only proof of an employment contract.
Better rates than traditional loans if you are going for a jumbo mortgage

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Depending on your lender, there may still be other options. All of the lenders who I spoke to stated that borrowers would still need to have a good credit score above 700.

When should I consider a Doctor Loan?

In the most extreme case, no financially cognizant person should obtain a doctor loan with the intention of overextending your earning power. For example, if you are a neurosurgeon starting your first job that brings in $1.4 million of income annually, you could reasonably get a doctor loan on a $1 million house with a $50,000 downpayment. Assuming that you can hold your job for the next few years, you should be in decent financial shape.

In contrast, everything else belong is a questionable situation. The average white-collar professional whose salary is in the $50,000 range may actually own a house that’s five times his annual salary ($250,000). Similarly a doctor who earns $250,000 annually might be able to “afford” a $1.25 million home. Through a doctor loan, you might be able to buy this home without having to cough up $250,000 for a traditional mortgage downpayment.

Will the lender underwrite such a loan for you? Probably. Most likely. Prior to the housing crisis, doctors could get approved for loans easily with very little oversight. It’s a little bit more difficult now, but is still easier than what the average consumer will experience simply because you as a doctor, you should have a stable job.

Should you use the doctor loan in this scenario? Probably not.

Ultimately it depends on what lifestyle you need to live at the moment and how you would fare otherwise.

You know that you’ll definitely be living in the same place for the next five years.

If you are a high income physician who knows that you’ll definitely stay at your job for at least the next five years, you can entertain the ideal of buying a house. Let’s say that you really don’t have enough in your savings account just yet to make the standard 20% downpayment…perhaps the doctor loan is for you. I knew an orthopedic surgeon who used a doctor loan on a house that was priced significantly below market value. At the time, he was planning to stay in the area for at least the next few years, but putting down 20% would have been a stretch for his purchase. (He found another job two years later in another state).

You’re an investing superstar.

Not having to plop down a significant chunk of your savings on a house allows you to invest the difference to your liking, whether in the stock market, real estate investments, gambling, bonds, P2P lending, or under your mattress. Most mortgage rates run in the 4.5% or less range, so there is some merit in hedging your investing luck/skill elsewhere.

Should you do it? I’d have to argue that most doctors should not get a doctor loan for this reason alone—there are more financially naive doctors than business shark doctors. It’s probably unwise to think that you are an anomaly.

What are some other reasons why doctors should get a doctor loan?

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(Photo courtesy of TaxRebate.org.uk)

The fundamentals of mortgage loans – Part 3

Posted on July 2, 2016January 30, 2021 by SmartMoneyMD

fundamentals of mortgage loans This post is the third part in the series on mortgages and my experiences:

Today I will continue where we left off previously with online mortgage lenders, considerations, and what I learned in the process.

To summarize, online mortgage lenders may actually have storefronts in other states, but are licensed to lend in your state. You can poll the top lenders online through Costco’s website or through BankRate.com. I did both in my search. Having multiple offers allows you to have more flexibility and knowledge in the process.

Most of these lenders offer very generic information such as the rate, term, fees, and credits. I would say that the majority of online lenders had very low or NO lenders fees. Many of these lenders even offered lender credit! Let’s go through these in detail:

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Lender fees.

This is the black box in most lending statements. These fees are always convoluted and often masked by terms like origination fees, application fees, processing fees, and underwriting fees. My local lender had all of the above terms. Many of the online lenders had NONE of the fees. This is quite bizarre to see such a wide range of costs. These numbers can run in the hundreds of dollars each, and total in the thousands!

That’s right. Straight out the gate, you can end up spending a few extra thousand dollars depending on which lender you are going through. I asked the online lenders why they can still give borrowers a relatively low rate and have almost no fees, but most of the answers did not seem too convincing:

“We run a very lean operation, and pass on the savings to the consumers.”

“We have a small physical footprint, so our costs are low.”

I also asked for a “Truth in Lending Statement”, which typically outlines various closing costs and fees. One online lender provided a rudimentary form with most of the blanks empty, while the others told me that they no longer provide these statements, given that all loans signed after October 2015 are not mandated to provide one. Instead, there are “Loan Estimate” statements that are provided. However, most of the online lenders were very vague—they all only provided an interest rate plus a certain lender credit given the type of loan requested.

My local lenders were, for some reason, more forthcoming with their expenses. All of them provided me with a “Loan Estimate”. There was some variability in some of the numbers, but certainly gave me a better idea of the closing costs that a mortgage incurred.

The following is a list of common closing fees and my comments:

Appraisal fee. This is mandatory, and is a means for your lender to determine whether the property you are purchasing is worth their risk in lending you money. This price is not negotiable as the lender typically chooses the appraiser. There is variability among lenders but I would estimate that it should cost around $500 or less.
Title fees. These fees are dependent upon which title company you choose. You can choose which title company to help close the sale. However, depending on how your realtor arranged the sale, the escrow company that handles earnest money may actually be the title company as well. When I placed a deposit of earnest money, the escrow company was the same as the title company. This meant that it would have been very difficult to make other arrangements outside of the predetermined company.
Origination fees and Lender fees. This number is negotiable. A portion (or all) of these fees will go to your loan originator as “commission”. Some lenders will be more willing to budge than others on this number depending on how they are paid.

What other fees have you seen on your closing cost sheets?

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Photo courtesy of Flickr.

Dealing with online lenders

Posted on June 26, 2016January 30, 2021 by SmartMoneyMD

dealing with online lenders In my previous post, we discussed some of the first steps in getting a mortgage loan. This post will focus on online lenders.

Frankly, the loan process was confusing as hell, especially to a first-time home buyer. Hopefully my series of posts will help reduce some of your anxiety and point out some mistakes not to make.

The Process of Online Loan Applications

I submitted my loan reapplication criteria through Costco’s website. This collates basic data such as the amount that you plan to borrow, the type of loan, the cost of the property, and your estimated credit score. A list of vendors approved by Costco will be available with basic estimates on the rate that they typically offer for the life of your loan. You can then choose which lenders to contact, and you will eventually be contacted by these lenders both by e-mail and by phone.

Bankrate.com also has sponsors who offer very competitive rates. I submitted a few test requests as well. Note: submission of this generic information does not constitute an application.

The Good.

The centralized process to receive bids through online lenders makes it easy to compare quotes. At first glance, the online rates were significantly better than what my local lenders offered. For instance, one of my local lenders offered a rate of 3.125% on a conventional 15 year loan while most of the online lenders offered rates around 3% or less. Obviously this is a relatively small difference, but it is clear that online lenders are more willing to offer lower interest rates even without any negotiation. This is an important point, as there is no free lunch. Realizing this was the first step in figuring out who was actually giving you a better deal long term.

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The bad.

The unfortunate result of having so many bids is that you will be swamped with calls. I believe I submitted my contact information to about 5 lenders, and ultimately received over 15 calls in one day. This was during business hours on a weekday—I obviously had no time to return most of the calls.

Even though borrowers often focus on interest rates, there are a number of other factors that are critical in making a loan decision. Unfortunately, there is little standardization among lenders. After preliminary discussions with many of the lenders, including my local ones, the terminology used by each of them was confusing in that it was not easy comparing the details.

Understand the terminology.

It is challenging to learn the terminology on short notice, especially if you have already found a house that you are interested in buying. There are plenty of real estate books available in the library that you can peruse before you delve into the home buying process, but here are a few critical terms that I found helpful in understanding:

Interest rate. Realize that the interest rates quoted may not necessarily be the same as the annual percentage rate (APR). As your interest accumulates in your loan, the amounts compound. Hence, the APR is what you will actually pay over the long term.
Points. As someone who is rarely involved in debt accumulation, I was ignorant about what points were. As with stock market points, each point typically represents a certain percentage of the entire sum. In real estate, one point represents 1% of your loan amount. These “points” are often used to settle on a lower interest rate. For instance, a lender may offer you a loan at 3.5%, but if you “buy” a point, they may be able to knock down the rate to 3.1%. In essence, points are means to “buy into a lower” interest rate. Obviously you’d have to do the math to determine whether the points are worth it, but the first time I learned about this concept I was fascinated.
Origination fees. Closing fees. Lender fees. Very confusing. Some lenders have “no fees”. Otherwise will have various fees tacked onto the closing statement. Make sure you understand where the charges are coming from. This portion of your loan will likely have the most variability among lenders.
Closing costs. Some costs such as appraisal fees, title fees, and various escrow amounts are unavoidable. Some of these fees are mandated by the loan company. What I didn’t know initially was that you can still bargain for better deals. One example are the title fees. You can shop around for title companies and negotiate for the lowest bidder. Is it worth your time? I don’t know. My real estate agent worked with a title company who handled escrow accounts to hold onto earnest money for potential buyers. It turned out that I was also deep into contract with the seller and title company before I realized that I could actually shop around for a title company. Would I have saved more if I had looked? Most likely. Would it have been worth the hassle? It might not.

Stay tuned for the next installment where I discuss online vs local lenders in more detail.

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(Photo courtesy of Flickr)

The Basics of Home Mortgages and How Not To Get Scammed

Posted on June 20, 2016January 30, 2021 by SmartMoneyMD

the basics of mortgage and how not to get scammed I’m in the process of purchasing a home, and figure that I should document the process that I’m going through, the problems that I’ve encountered, and what to do to get the best deal possible. If anything, I’m sure that it will be helpful for me in the future if I decide to purchase another home.

First off, this series will detail the process of purchasing a residential home through a mortgage lender. If you are purchasing a property for commercial purposes (such as rentals), the process will be different.

When do I need a loan?

There is an obvious answer for most of us, but there are also plenty of people who are in the position to purchase a property outright. That means a cash deal without having to go through a bank. The advantages of avoid loans altogether include not having to deal with a lender. You can agree on a set price with the seller and close the deal once you agree on a price and finish up any inspections. In contrast, going through a mortgage lender may delay your closing date by several months!

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There is also validity in obtaining a mortgage even if you are able to purchase a property with cash. With interest rates as low as they are now, you might even consider investing the difference. The Internet is littered with debates on this subject, so scroll around the web for discussion. I may revisit this debate in the future, but this has less to do with obtaining a mortgage.

Where can I get a loan?

In general banks and credit unions are the most obvious sources for loans, but these are actually not the most common institutions offering loans. Mortgage lenders and loan originators are individuals who work for certain institutions that are able to secure loans for potential buyers as well. Consider these guys the middlemen in loan dealings. Your real estate agent will likely have a list of agents (and probably their favorite one) who have helped clients secure loans.

You can obtain a mortgage through Costco!

If you are like the average upper middle class American, you probably have a Costco membership. If you don’t, you can even consider getting one. A Costco Executive membership costs $110 annually. You might save more than that on lender fees.

Costco assists with mortgage lending by pairing you up with potential lenders involved with their program. You can fill in your lending terms and potential lenders will bid for your business. These lenders are not likely to be in your local area, but are all licensed to lend to you.

The motivation behind going through lenders outside of your local area is that they might be able to offer you a better rate and terms than your local lender. Moreover, speaking to multiple lenders will allow you to familiarize yourself with more of the terminology, what terms are negotiable, and how different lenders approach the lending process.

Stay tuned for upcoming installments on mortgages! We will talk about the steps I went through and my experiences with the Costco lenders.

Photo courtesy of Flickr.

Being a Doctor Could be A Guaranteed Way To Have A Stable Job

Posted on June 18, 2016January 30, 2021 by SmartMoneyMD

being a doctor could be a guaranteed way to have a stable job Ever since I started working harder to build my medical practice, I’ve found it more challenging to stay up to date in the digital world. I end up coming home tired, cranky, and famished on days that I don’t take the time to eat appropriately. I stand by my opinion that just as medical conferences are bad for your health, so is working too hard at your job.

I finally was able to catch up on one podcast in the car along the way between meetings by Joshua Sheats, of Radical Personal Finance fame. In the latest episode, Joshua debates the merits of being a doctor with Peter Steinberg, a urologist at Beth Israel in Boston.

Thought provoking discussions, I might say.

I haven’t followed the entire podcasts of Radical Personal Finance from the beginning, but I take it that Joshua (who is not a doctor) believes that becoming a doctor is not worth the cost.

I absolutely agree with Joshua.

To summarize, there is a huge cost in becoming a doctor: time, increased risk, sacrifice of financial growth through compound interest, and sacrifice of talent that could be used in other careers. I agree, to become a family physician or an ER doctor, you need to invest eleven years in your training. You’d be lucky to get a job earning $200,000 as a family physician. We practice in a risky field. Doctors get sued. Patients can and will have bad outcomes. We are more than 10 years behind our peers financially. Our job is hard. In the podcast, Joshua makes an analogy that a plumber can achieve financial independence by starting out early while apprenticing in grade and high school. This hypothetical plumber can earn $100,000 a year around age 20. Additionally, he’ll also learn the value of small business, tax laws, and common sense by working for himself. By age 30, he will have becoming financially independent and be able to do whatever he wants.

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Dr. Sternberg argued that despite the long years and hard work, being a doctor guarantees that you will be employable, have a high income, and have a meaningfully long career since most medical practice is not as taxing as, for example, being a laborer. More importantly, the plumber example that Joshua gave was extreme. What kind of plumber has his act together enough to map out his future starting at age 15? The average vocational worker may not necessarily have the organizational and foresight to become this successful. True.

How successful can a doctor who knows how to plumb be?

Fortunately for these guys, Smart Money MD is a board-certified doctor AND handy with plumbing. I’ve written about cleaning lime deposits from your toilet bowl, maintenance for Kohler toilets, and changing the flush valve in the Mansfield toilet. Plumbing is dirty work, but you can definitely command a high hourly rate. I would not be surprised that plumbers who run a moderately successful business have higher net worths than more doctors up until their early-mid 50’s.

Would I have been successful as a full-time plumber? Most likely. Would I have had a higher net worth as a plumber than I do now as a doctor? Definitely for now. Based on what I earn and the number of years I spent in training I’d need a total of 15 years after fellowship to catch up even with aggressive saving. Of course as a doctor, I’m obligated to have higher living expenses.

I agree with Dr. Steinberg that not all doctors are capable of having any other jobs. Most doctors I know majored in Biology, Chemistry, or other non-vocational subjects that would otherwise condemn them to an income range between $60,000 and perhaps $120,000 (if they’re lucky). Some doctors may not have had the exposure growing up to realize that one can earn a comfortable living as an electrician or plumber.

Where I do disagree with Dr. Steinberg is that not all doctors actually would be better off financially as doctors. Think of the lower income physicians. These doctors’ income ranges are very close to that of many vocational specialties. Some of them choose these specialties because they are misinformed, unsure what they want to do with their lives (more common than you’d think), or ideally because they like it. There are likely more lower income physicians than the higher income ones. The argument for being a doctor is also easier if you are one of those high income doctors (likely urologists!).

Would I have become a doctor? It depends on what I would have been otherwise. Software developer? I would have been equally or more challenged as a software developer. A plumber? I probably would not be as happy if I were a plumber, mainly because I am not sure that it is as intellectually stimulating as being a doctor. The grass is likely greener on the other side, but if I were a plumber, I’d probably wonder what life would be like if I were a doctor…

Fortunately I already am a doctor, so I’d have some more flexibility becoming a plumber if I really wanted…

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(Photo courtesy of Flickr)

Do I need to send my kids to private school?

Posted on June 11, 2016 by SmartMoneyMD

should my kids go to private school I think that all parents hope that their kids live better and more successful lives than themselves. We strive to give them the best opportunities possible, whether it is through education, extracurricular activities, or cultural exposure. I can certainly say that I certainly had a more luxurious childhood than my parents, and that subsequent generations are having more luxurious lifestyle than I did.

One common point of contention I encounter with present education is whether to put your kids through public or private primary school. This is strictly a first-world problem, as one would assume that most public primary education schools (K-12) in the U.S. are relatively safe. The real question is, which situation would allow my child to thrive and succeed? Would public school be good enough for my kid? What is the best way to get my daughter into an Ivy-League school?

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Private school is superior

Assuming that life is fair and that you get what you pay for, private schools MUST afford better opportunities for your children. Better education. Better teachers. Better extracurriculars. Better counselors. Hell, the average private elementary tuition was $8441 per year. For high school, it was $12,900. I’ve seen private non-boarding high school tuition in the Northeast running in the $25,000 range. Those in Manhattan are even more.

If you can afford to actually pay your teachers, shouldn’t you get a superior education? Furthermore, the cost filters out those in the lower income pool, which can potentially filter out the less educated!

Those of you who balk at the cost of private schools can read the article from Time Magazine in 2014 arguing that private school can potentially save you money. That’s right. Private school is cheaper because if you send your kid to private school, you don’t have to pay as much for your house to be in a good school district. A nice house in a B- school district will save you money.

Bullshit.

When was the last time someone you knew chose a “B- school district” to save money because their kid goes to private school? There are families without kids who buy homes in good school districts simply to help increase resale value. Most people I know who send their kids to private school actually live in good school districts anyway.

You will spend more in a private school.

This not only includes the cost of tuition, but also any ancillary costs like textbooks, school trip fees, uniforms, and sports equipment.

Is it really worth it?

Going to a private school will not guarantee that you will get into an Ivy League school. It can certainly give you a supportive environment to potentially increase your changes of entrance into a good college, but by no means does it guarantee success. Highly successful students from middle-range public high schools are also likely to enter great colleges as well—it ultimately depends on your beliefs, access into good private schools, and your wallet.

As a high income professional, you should be able to afford to place your kids in these opportunities. Just understand that costs of about $50,000 a year for two kids in private school for at least 4 years will add up. This doesn’t even include college! If you have plans to retire early (FIRE), make sure you save up as much as you can before you decide to send your kids to private school.

(Photo courtesy of Flickr)

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A financial plan for busy people

Posted on May 20, 2016 by SmartMoneyMD

financial plan for busy people One the fundamental rules of sustaining and growing your hard earned money is to create a financial plan and stick with it. I’ve seen all sorts of guidelines and plans from financially independent bloggers. Some plans fit on a 4”x6” index card. Others include extravagant spreadsheets that include Trinity Rule references, real estate investments, tilt, and often brilliant means to reduce your tax burden.

All of these strategies will work in each individual case, particularly for those who stay on top of their finances and methodically track their money. This only works in two basic situations: (1) Your job allows you enough time either during work or after hours to focus on your finances, or (2) You’ve already reached financial independence and aren’t forced to live the cubicle or daily grind to generate income.

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This type of lifestyle doesn’t work well for guys who are running to stroke codes all day long or dealing with 60 clinic patients a day. If that is your day job, you probably aren’t going to have much energy after you get home to do much of anything else. If anything, many professionals do the opposite—we vegetate, justify splurge purchases because we “earned it”, and neglect to focus much time to our financial future.

I still have those busy days (almost every day), but I also have tried to simplify my financial strategy to the level that I can relate to and automate.

Stick with the plan, but be willing to adjust throughout your working career.

Some financial principles should be non-negotiable no matter what stage of your career you are in. You must save more than your spend in order to grow your financial stash. Period.

Everything else is variable depending upon your income level and net worth. Here are my principles depending upon your situation:

Student and resident (<$80,000)

Pay off at least $2,500 in student loan interest per year. This is a deductible event. If you are accruing interest on your loans, this is the best time to reduce your tax burden. Once your income exceeds the ceiling for student loan interest deduction, you are out of luck.
Contribute to your Roth IRA fully. Remember that a Roth IRA holds post-tax income. The earnings in this vehicle will not be taxed no matter how much they grow. Since the annual contribution amounts are relatively small, you are limited by how much time you have to build up the cash. I knew financially savvy college students who maxed out their Roth IRAs through part-time jobs. Their parents (upper middle class) were willing to max their salaries to give them spending money. Not a bad way to build up your Roth IRA amounts with time.
Keep your Traditional IRA bucket empty. Most doctors and highly paid professionals will exceed the standard Roth IRA limits once they increase their earning potential. You can still contribute to your Roth IRA through backdoor method. If you have no money in your Traditional IRA, the conversion process is much easier, and you can avoid taxes.
Save the rest of your earnings toward repayment of student loans or ancillary investment vehicles. I know a few medical residents who are landlords and generate a reasonable cash flow from their properties. Doesn’t always work out once they graduate and end up moving away.

Mid-career professional

Contribute to the maximum limit in all of the investment vehicles available to you. This includes Roth IRAs, 401k/403b plans, Profit-Sharing Plans, and even better, Individual 401k’s. Be wary of profit-sharing plans and the terms. Some plans require you to work a certain minimum number of years before you’re fully vested. This won’t work well if you end up having move between jobs.
Invest in a taxable account. Unfortunately maximizing your tax-deferred and tax-advantaged accounts will unlikely generate enough nest egg for you to retire on. I would roughly assume that a high-income professional would want to retire on at least $100,000 a year. Gotta have those fancy vacations, right? The 4% Trinity rule would say that you need to have $2.5 million in the bank, and that amount needs to be liquid too. It would be tough to build up that amount solely within a 401k.
Buy umbrella insurance. If your net worth minus your protected accounts (401k’s, cash-value insurance…etc) is around $1 million or above, buy some umbrella insurance. The annual premiums won’t likely be much, and can give you more piece of mind. More on this in a later article…
Figure out what other options you would feel comfortable with placing your money to diversify. Is it real estate? Is it stock market? Is it crowd-funding lending? Gambling? Restaurant franchises? This is your chance to make good on the hard work you’ve put in to get to where you’re at.
Track your net worth growth. If you’re going to exceed the federal limit for estate tax, congratulations. You’ve won the game. Spend the rest of your time figuring out how to reduce your estate tax.
Contribute to 529’s if your state allows tax reduction. You can make accounts for your kids, your nieces and your nephews. If you play your cards right, you can potentially have enough for the family.

Retirement

At this point, if you played your cards well, you might still be under 60 years old. Perhaps even less than 50. Your money should run on auto-pilot. Work on your estate tax plans.
Stay active. Volunteer. Travel. Start a blog. Spread the gospel. Teach other medical professionals. Do what you’ve always wanted to do.
Stay out of trouble and don’t invest in get-rich schemes, no matter how much you have stashed for your retirement.

That’s it. Basic. Simple. As you become more well-versed in your career, you will have more time to study your finance or whatever else you like.

What other finance plans have your implemented in your strategy?

(Photo courtesy of Flickr).