So you have graduated from Medical School and you have become a doctor. You have taken on quite a bit of debt but you want to own your first home. Now just because you have a considerable amount of debt doesn’t mean you can’t have a home. Let’s look at the following loan examples and hopefully you can make a decision on what loan is right for you.
If you are a first-time homebuyer, a buyer with weak credit history, or you have minimal funds for a down payment this is definitely the loan program for you.
A low minimum down payment (currently 3.5%): With a minimum credit score of at least 580, you will be able to purchase a home with only 3.5% down. The FHA is very lenient here when it comes to down payments. You can also use gift funds as part of your down payment given they are from an acceptable source. Money received from relatives or your employer are perfectly fine, just make sure you document and verify these funds.
More flexible income requirements and debt-to-income ratios: With FICO scores of 620+ you are able to borrow with a back-end DTI ratio of 56.9% where other loan programs will only be around 43-47%. FHA loans let you take on more debt as a result of purchasing the home which is a strong positive.
Conventional loans are those that are backed by government sponsored entities Fannie Mae and Freddie Mac and NOT FHA. They are different than renovation loans hampshire In most cases, if you can’t afford to put down 20% on a loan, you will be required to have PMI or Private Mortgage Insurance. You will still get a very good rate but just have PMI until the loan-to-value (LTV) is less than 80% at which time the PMI will go away.
Conventional loans with 20% or more down will allow you to not have the obligation to pay for PMI. Since you already have an LTV of 80% or less PMI is not required. If you have 20% to put down this is the way to go as you will save hundreds of dollars a month you would otherwise pay on mortgage insurance. Granted if you have debt from your medical school, putting 20% down may not be an option for you.
If you are a veteran, a great loan you can try to get approved for is a VA loan which is a loan sponsored by Veteran Affairs. There are very attractive loan characteristics if you are able to get approved. You can get these loans with 0% down and without PMI for the duration of the loan. The only fees you will have to pay is a VA funding fee which you can also roll right into the loan you are taking out. Based on experienced loan officers from loan consultants there is also a lenient DTI ratio of 41% on the front-end meaning your mortgage payment can be 41% of your monthly gross income. These favorable terms are worth it for those individuals who have fought for this country.
These loans also known as a “piggy-back loan” are loans designed to give you 100% financing but without paying PMI. These loans were very popular before the housing collapse, but are starting to come back around again. Basically, the borrower takes out a standard 80% loan against the home and at closing takes out a subsequent line of credit with another lender for the remaining 20% of the purchase price. Since the 20% is normally a line of credit, you will have to make sure the monthly payment for this doesn’t exceed what PMI would have been or you will end up paying more money in the end. Also with the 20% loan, you might be only paying interest so you won’t be paying that balance down at all unless you proactively make principal payments to it.
This is another loan in the “piggy-back” category and here are the reasons why. As with the previous loan, you are still getting a standard 80% loan from your primary lender, but the next 10% will be your line of credit 2nd mortgage, and the final 10% represents your down payment due at closing. Again, going this route will eliminate the need for PMI and could save you hundreds of dollars if the 2nd mortgage isn’t expensive to pay. In both situations, piggy-back loans are gaining in popularity as the housing market rebounds and home values are increasing.
When it comes to deciding which loan is best for you, you need to figure out your current situation given your FICO score, gross monthly income, and amount of down payment you can afford. If these loan programs are overwhelming, please feel free to reach out to me and I can ensure that you get put in the loan that is right for you. Don’t let student loan debt get in the way of owning a home.