The Kentucky Derby is still a couple of months away, but in two weeks on March 17th, we will see a bunch of energized and excited IUSM fourth year medical students hitting the pavement, just having found out where they will be for the next 3-7 years. We have just come off a very successful Future Impact Program with the fourth year medical students on Saturday, March 5th. Topics on home buying, financial planning, insurance and taxes were the focus of the day, but for this blog today, I am going to focus specifically on the home buying discussions we had.
Several years ago everywhere you turned there were 100% financing mortgage programs aimed at medical residents. They still exist today despite the major changes in the real estate market and the major overhauls in the mortgage lending process. We are fortunate in Indiana that we have several 100% financing programs through the various local lenders. Lenders like Huntington Banks, National Bank of Indianapolis and Regions Bank all have medical resident mortgage programs that specifically target the fourth year medical student looking forward to the complexities of home ownership after matching and later graduating in May 2011.
For many of our fourth year medical students who match in Indiana and in some of the more comparable cost-of-living states, home ownership is a potential reality. Let’s take a look at some of the questions posed by these students.
I have matched in Indiana and I am ready to purchase a home, now what? More than likely, these are some of the general steps you take in the home buying process. First, you contact one of the lenders above for a pre-approval or pre-qualification. Select an experienced Real Estate Agent. Experience is the key here, someone who has worked with fourth year medical students and medical residents in the past. Go out and find your Dream House. Get back with your lender to finalize all necessary paperwork. RELAX, sit back, and wait for the closing. Congratulations! You are now a homeowner. This sounds easy, doesn’t it? WRONG! There is more to this process than meets the eye. This is why having experienced professionals is so important in this process to avoid the many issues that can potentially happen. A corner branch bank is not where you start, nor is looking for a real estate agent in the yellow pages sufficient.
What will the bank look at to see how much of a house I can afford? This may be a very common question given the large educational debts and very little income medical residents will have in the immediate future. For example, a bank will be looking at the credit score (most loans require a minimum credit score of 680-700). This score is used to indicate the quality of a borrower’s credit history and the likelihood that debt will be repaid in the future. Next, the bank will look at the Debt-to-Income ratio. This is the amount of debt compared to your monthly income (most lenders allow a ratio of 38-43%). For medical residents this may not include the student loans. Lastly, the lender will look at the housing ratio. As a general guideline, a bank allows 28-31% of your gross monthly income for monthly housing expenses.
How much will this cost me? There are three sets of costs when you do a mortgage: closing, pre-paid items and a down payment. The closing includes an appraisal, title work, recording feeds, underwriting fees, etc… Pre-Paid Items include a one year homeowner’s policy and escrow. The escrow account is similar to a savings account for your home used to pay property taxes, homeowners insurance and interest on the loan to the end of the month. The down-payment can vary, but may include points (1point equals 1% of your total loan amount) and/or an origination fee (fee to the loan provider).
There are other questions that are critical to the process. Some of these questions include:
What is the best mortgage product for me? Most likely, with the inability to have a down payment, a 100% financing program is going to be a focus among many fourth year medical students seeking to buy a home.
When can I lock my interest rate? With interest rate relatively stable, you will want to discuss this with the lender. I recommend you lock in as soon as you can and not try to play the game of chasing the rabbit. With all of the global issues currently happening it all eventually trickles down to the financial markets and impacts mortgage rates.
Is there a pre-payment penalty? If there is, you want to consider another program. It is not common for reputable lenders to have a pre-payment penalty, but do ask.
What is the minimum down payment? With 100% financing programs, there is no down payment requirement, unlike FHA programs and conventional mortgages that may require a significant down payment.
Are there points? If a lender is charging point(s) you will need to fully understand the benefit, if any, you will receive. In the end, go look at another program. It is always good to get a second opinion.
Can I borrow more to do home improvement? Generally, this is not allowed.
Are Condos any different than a home loan? Yes, there are significant differences with home association fees and other fees generally not part of owning a home.
Lenders are now required to collect the following documents:
Proof that Student Loans will be deferred for twelve (12) months or longer
Copy of transcripts/diploma (shows 2 years history of “employment”)
Last two months of bank statements (all pages)
Letter of Employment/Contract
If using co-borrower income – last two pay stubs and last two years W-2’s.
So, what does this all mean anyway? It means that you have many decisions to make after the MATCH on March 17th. The question that is first and foremost is does a resident rent or buy? A typical resident earning $48,000 gross will have approximately less than $2,800 a month in disposable income after taxes. It is probably acceptable to have a monthly mortgage of $1,050. This translates to a home purchase price of $160,000 or less. In Indiana, this can be a decent size home in a location that is acceptable.