By M. Shayne Ruffing, CLU, CHFC, AEP
At this time of year, many departing residents are faced with the issue of relocation. Paramount is the issue of where you are going to live, and under what terms! With interest rates at near historic lows and very liberal financing, it is easier than ever for starting physicians to purchase a new home. The focus of this article will be on three facets of the mortgage process:
- Qualification for a mortgage
- Mortgage Options
- Working with a mortgage professional
Can you qualify? The first thing that you must understand about a mortgage is the enormous role your credit history plays in the overall process. Good credit will allow you to name your own terms in many cases; poor credit will subject you to high interest rates and limited options. “Credit” is managed by the credit reporting industry. There are three credit bureaus that report to this industry, whose combined information is compiled in to a numerical rating. This rating is known as the Fair Isaacs Company, or FICO, score. Scores range from a very low of 579 to the highest rating of 850.
Following are the minimum FICO scores that you must have to get the best rates:
- Home Purchase 620
- Refinance 680
- Credit Card 700
You can check your own credit at www.myfico.com for $44.95. I recommend doing this every two years. Once you understand your credit, you will need to review the various types of mortgages. This is where a mortgage specialist can be invaluable. If you are going to practice in a totally
new environment, you may not want to lock into a 30 year fixed loan. If you are going to practice in your hometown, a longer term mortgage may be attractive to you. In short, here are a few recommendations, based on how long you might stay in the home you are buying:
Less than 5 years: Consider an adjustable rate mortgage (ARM) or even an interest only loan. With a 3 or 5 year ARM, you are going to get a competitive interest rate that will fluctuate within preset ranges for the first 3 or 5 years. After that, the rate can increase within certain limits. Another consideration is an interest-only loan. This will result in the lowest payment and is a competitive alternative to renting. Conceptually, you purchase a home, pay only the interest on the note, and when you sell the property you realize any appreciation in value as equity. It is renting with an upside.
5–8 years: Compare the rate of a 7 or 10 year ARM with a 30 year fixed rate mortgage. A good mortgage planner can run a comparison summary that will show you your initial costs, monthly payments, principle paid (equity) and what your ultimate cost will be over a given time horizon.
8 Years or longer: Give serious consideration to a fixed rate mortgage with either a 30 or 15 year note. The 30 year option gives you the lowest monthly payment and gives you the most control over a long timeframe. You can always increase your principal payments, or pay the minimum payment depending on your cash flow and other financial priorities.
Mortgage Professionals: There are many types of mortgage professionals. You will find bankers who typically represent a single lending institution or brokers who represent multiple lenders and will shop for the best program for you. If you have large amounts of student loan debt, you may need to work with a banker due to specific programs, or “Doctors Loans” that many banks have established. These are programs where the bank absorbs risk that a commercial lender is unwilling to take, and they charge you a higher rate for this risk. My suggestion is to interview several professionals and work with the person who has the greatest understanding of the culture of medicine. In particular, they must understand that just because you have a current salary of $42,000 and student loans of $150,000, you are not a poor risk!!
I hope that this information is of value to you and wish you every success as you move through the phases of your career.