Doctor’s vs. Conventional Loan

A few differences between doctor’s vs. conventional loan

  1. doc loan low or no down payment (Compass requires 0% down, BOA requires 5% down)
  2. Doc loan no PMI (Private Mortgage Insurance)
  3. Doc loan takes future income up to 60 days prior to starting the new job/new income (but this may apply to only the “doctor” applicant, and not a non-doc co-applicant, so they may require Your 2014 tax return and your new pay stub)
  4. Doc loan has higher interest rate than conventional loan

Various terms you may want to inquire about

  1. FHA: see there’s the 1st time home buyer assistance program. perhaps you can get government funded 2nd/silent loan (may be interest free or super low interest) to source your down payment. this way you can avoid PMI & get a good interest rate.
  2. ARMs: Adjustable rate mortgage, this usually has lower interest rate for its fixed rate period than the fixed mortgage rate products. this is for people who CAN pay off the mortgage quickly in the event that the mortgage rate adjusts really high after the fixed rate period ends and refinancing is not beneficial (new refi rate is still not low enough). people who can handle the worst case scenario can benefit from the savings on interest & building up equity faster in the fixed rate period. 5/1, 7/1 (just did a 7/1 refi on our 1st home), 10/1. *the first # is the duration in years the rate is fixed, the 2nd number is the frequency in years the rate is adjusted thereafter. so usually the shorter the fixed rate period (1st number), the lower the initial mortgage rate.
  3. conventional 30 year fixed: lock in a low rate for the life of the loan
  4. doctor’s loan: since we likely won’t have money for down payment, this may be our only way to get our foot in the door NOW. but if we wait and save up, then we don’t have to take the higher rate of the doctor’s loan. it might also be worth waiting till your FICO get above 740 (where you will get the lowest mortgage interest rate while holding other variables constant) although some mortgage companies will look at potential actions you can take to increase your score & take the higher score as long as you prove that you CAN take those actions (e.g. pay down credit cards, etc.)

physician-home-loans-at-fimc

travis
Travis is great, I got my 2nd home loan with him. A much better experience than my prior 3 mortgage experiences.

 

 

 

Good luck with the meeting; I’m excited for you and here to support you however I can 🙂

 

 

 

Taxes: Benjamin Was Right.

“In this world nothing can be said to be certain,

except death and taxes.”

— Benjamin Franklin

 

As I explore how best to convey the importance of tax-efficient savings to my peers, I did a little math on how much we pay Uncle Sam as we progress through various stages of our careers.

I divided a doctor’s financial journey into the following stages:

  1. MS years: assuming 6k annual income
  2. Early PGY years: assuming 53k annual income
  3. Later PGY years: assuming 100k annual income (moonlighting)
  4. Early attending years: assuming 250k annual income
  5. Seasoned attending years: assuming 400k annual income
  6. Retirement years: assuming 150k annual income

*Assumptions include single filing status and Arizona resident.

MS years: 7.65% income to income taxes

Tax Type Marginal Tax Rate Effective Tax Rate Tax Amount
Federal 0.00% 0.00% $0
FICA 7.65% 7.65% $459
State 0.00% 0.00% $0
Local 0.00% 0.00% $0
Total Income Taxes $459

Early PGY years: 22.2% income to income taxes

Tax Type Marginal Tax Rate Effective Tax Rate Tax Amount
Federal 25.00% 11.95% $6,333
FICA 7.65% 7.65% $4,055
State 3.36% 2.60% $1,377
Local 0.00% 0.00% $0
Total Income Taxes $11,765

Later PGY years: 29% income to income taxes

Tax Type Marginal Tax Rate Effective Tax Rate Tax Amount
Federal 25.00% 18.08% $18,083
FICA 7.65% 7.65% $7,650
State 4.24% 3.31% $3,314
Local 0.00% 0.00% $0
Total Income Taxes $29,047

Early attending years: 34% income to income taxes

Tax Type Marginal Tax Rate Effective Tax Rate Tax Amount
Federal 33.00% 25.53% $63,817
FICA 2.35% 4.55% $11,386
State 4.54% 3.97% $9,933
Local 0.00% 0.00% $0
Total Income Taxes $85,136

Seasoned attending years: 38% income to income taxes

Tax Type Marginal Tax Rate Effective Tax Rate Tax Amount
Federal 33.00% 29.80% $119,186
FICA 2.35% 3.73% $14,911
State 4.54% 4.19% $16,743
Local 0.00% 0.00% $0
Total Income Taxes $150,840

Retirement years: 31% income to income taxes

Tax Type Marginal Tax Rate Effective Tax Rate Tax Amount
Federal 28.00% 21.33% $31,991
FICA 1.45% 6.35% $9,522
State 4.24% 3.62% $5,434
Local 0.00% 0.00% $0
Total Income Taxes $46,947

A few things I noticed/ reaffirmed,

  • I should have maxed out my ROTH IRA all 4 years of medical school.
  • During my first full tax year as an attending, I will be paying more taxes than I make this year as PGY2.
  • I should save POST-tax whenever possible as PGY because the taxes I pay now is 55% cheaper than I what I will pay as a freshly minted radiologist. ROTH ROTH ROTH.
  • I would likely choose a 1099 attending job (independent contractor) over a W2 (employee) job when other job-related considerations (lifestyle, locale, group environment) are comparable. Filing taxes as an independent contractor, when done right, provides tremendous tax savings.
  • During my early attending years, I will likely contribute a mix of pre and post tax dollars to retirement (predominately pre-tax.) I anticipate that I will be paying a smaller % of taxes in retirement.
  • As many of us look forward to the 5 x increase in income, we also should be aware of the 7.2 x increase in taxes we pay. (early pgy to early attending)
  • Learn from a fee-based financial adviser or teach yourself, take advantage of each of your 6 tax seasons and maximize your net worth.

 Personal Finance, Investing, Retirement, Practice Management, & Lifestyle More articles like this on Physician’s Money Digest.

This article is for informational purposes only and not intended as a substitute for professional advice. Please consult a professional accountant, financial adviser or lawyer, before making financial decisions.

From Josh, America’s Coach in Physician Home Buying

[Josh is a good friend of mine who has a great deal of knowledge and expertise in physician home mortgage.  I’m happy to share a series of educational posts from him regarding this topic. So here you go, Josh’s debut on DWM. Disclosure: The Mettle Group is a paid sponsor of this website.]

 

First 3 of 6 Steps to a Flawless Home Purchase

 

In the post-mortgage meltdown world of mortgage lending, physicians face more challenges and have a higher rate of underwriter decline than any other professional client we work with.  It’s shocking but true.  Spend a few minutes in physician chat rooms where the topic is mortgage and you will read nightmare after nightmare horror stories.  It’s truly scary what a batched home loan and closing can do to a family.

The unfortunate reality is mortgage has become one of the most highly regulated and highly scrutinized industries in the country.  The Dodd Frank Act added an immense amount of regulatory disclosure as well as provisions such as the “Ability to Repay Rule”, which legally require a mortgage lender to PROVE you have the ability to repay your loan, or the lender could be fined up to 10 years of mortgage payments.  Think about that for a moment — if we make a mistake in how we calculate your income, or we allow you to close on an employment contract without all contingencies being removed, we could be found responsible to pay your mortgage for the next 10 years.  That is a lot of dough, and it should give you some insight as to why qualifying for a loan has become more difficult and less enjoyable from a client experience perspective.

So what can you do?  You can educate yourself, you can be more prepared, and more aware than your peers.  If you follow these Six Steps to a Flawless Home Purchase, you’re virtually guaranteed to come out the other side unscathed.

  1. Choose a Mortgage Professional Who Can Educate and Truly Guide You

If you just do one thing right, find a professional experienced with doctors and dentists. You’ve got to do your due diligence by researching and interviewing the professional. Make sure the mortgage professional has experience with physicians and has done a good job with physician clients in the past.

If you spend extra time and energy to find the right person and then allow that professional to guide you through the process, you’re much more likely to get to closing without a hitch. Physicians often run into trouble when they think that there is no reason that they shouldn’t get financing. For instance, the resident who was able to get a home loan back in 2006, before the mortgage meltdown, who is now making significantly money, may think that getting a home loan today should be easy and any bank would finance them. However, the physician may not be taking into consideration all of the factors, like his new position being a 1099 independent contractor or wanting to close on the new home prior to starting the new position.  Both of which would through a huge wrench in things for a conventional mortgage lender.

The reality is that a lot has changed and under the lens of the post-mortgage meltdown underwriting guidelines, getting a loan is not as easy as it used to be.  If there’s a deficiency with your situation, you need an expert to guide you through the loan process and all possible solutions.  Nobody is better able to do this than someone who specializes in physician home loans; they’ve seen all the same challenges before and have an arsenal of outside of the box solutions.

  1. Verify Your Lender’s Reputation

Once you think you’ve identified a good loan officer, verify his or her reputation. Look for past client testimonials and don’t be afraid to ask how many doctors they have worked with in the past few months and how many they are working with currently. If you don’t get a good vibe or you’re not sure, I’d advise you to keep looking or even ask to speak with past physician clients.

Once you’ve identified several loan officers in your area who appear to be experts, who have testimonials and who look like they serve physicians on a regular basis.  It’s really important to have a good phone conversation with them. Take a few minutes to cut out all distractions, don’t call from the freeway or emergency room (I’ve literally had a call from an anesthesiologist in the middle of a procedure). Find a place and time you can be focused on the mortgage professional you are interviewing, let them know any challenges that you can see, such as student loans, relocation to a new state and or job, source of down payment and ask them a couple of intelligent questions.  You will know in your gut whether the mortgage professional is the real deal.

  1. Obtain a Credit and Income Approval

A Pre-Approval is simply not enough for you to gamble your family’s new home on. You must get a full Credit and Income Approval.  The importance of getting all credit and income documents into the hands of an underwriter as early in the process as possible cannot be overstated.

The thing to keep in mind is that the underwriter is the one who has the final say.  Finding a seasoned loan officer who is experienced with doctors is a great first step, but at the end of the day, it doesn’t matter how good your loan officer thinks your file is because he or she is not the final decision maker. It’s not like a mom and dad situation where the underwriter and loan officer meet in the middle. It’s like a kid and parent situation and the parent in this situation is the underwriter. That’s where the buck stops.  Get all of your income, new employment contracts, student loan changes and down payment documents all the way to the underwriter and insist on a full Credit and Income Approval. Once you have that, you’re ready to rock.

If you follow these first three steps of the six steps to a flawless home purchase, you should be in great shape. You can’t do any more mortgage due diligence than that. The only way you could be more prepared to buy a home is if you had the money in the bank and were prepared to write a check for the entire purchase price.

But there are a few more things you can do to ensure the rest of your transaction is flawless.

 

Josh Mettle is an industry leading author and mortgage lender, specializing in financing physicians, dentists, fellows, PhDs, and physician assistants.  You can get more great physician real estate and mortgage advice at http://www.utahphysicianhomeloans.com/ or his book site: www.whyphysicianhomeloansfail.com.  Josh is also a fourth generation real estate investor, and owns a number of rental homes, apartment units and mortgages.  Josh is dedicated to helping physicians become more financially aware and able, download Josh’s latest tips and advice at www.physicianfinancialsuccess.com.
Copyright© 2016 JLM Industries.  All Rights Reserved

 

PETE Q&A PT 1

Q1. I applied to DRB with my current income of $0 with current debt, I got denied. Should I have put my future PGY1 salary on my application?

A1. Yes, PGY 1 income.

Q2. Refinancing vs. Fed payment with PSLF? Since I am a single and have no desire to spend on unnecessary things during my residency training, currently, I don’t think I will need extra cash flow from refinancing/consolidating my loans. If I am left with only fed loan repayment options, you recommended RePAYE with PSLF, due to the fact gov. pays the interest subsidy.

A2. Yes, Repaye makes senses as long as you are not paying more than the monthly-accrued interest. Remember the interest subsidy is 50% of the difference between your monthly-accrued interest and your monthly Repaye payments. As your income grows, your mandatory Repaye payments will too grow, which will lead to a smaller absolute value of interest subsidy.

By the time you are able to make your Repaye payment greater than the monthly-accrued interest, there will no longer be any interest subsidy. So Repaye is truly designed for the high debt/income ratio folks (like us in PGYs’).

Q3. If I apply to PSLF with RePAYE, am I locked in myself to only applying to 501(c) job positions during my job hunting time?

A3. No, you apply to IDR and PSLF separately.

Residency counts towards the PSLF 120 payment requirement. When you finish training, you can choose any job you want. 

Although people who allow their debt to grow out of control tend to limit themselves to non-profit PSLF eligible jobs so that they can get their debt forgiven in 4.5 years (assuming they enrolled in PSLF right after the grace period, in mid PGY1). You also CAN choose the job you like the most even if it’s Not non-profit. At that point, you will know definitely that PSLF is not for you and you can refinance your loans ASAP to a much lower rate.

Q4. If my assumption is correct and if you can recommend just one of IDR options, would you still just recommend me to be on RePAYE without PSLF (since radiologists are mostly privately contracted) compared to others like IBR or PAYE plans?

A4. If you choose and IDR, definitely sign up for PSLF too, because that’s the only reason one will sign up for IDR rather than refinance. Signing up for PSLF doesn’t hurt you but can potentially get your debt forgiven if you fall in love with an academic or government job.

Q5. If my ultimate goal is to pay off loans within 8-10 yrs. starting this yr. as I will start internship in July, 2016 (6 yrs. being on one of IDR options and 2-4 yrs. paying off aggressively by switching to standard 10yrs repayment after I become an attending) for a current 228k loan, what is the most appropriate option for myself who is trying to pay off as quickly as I can without letting the interest building up for a long term?

A5. Great plan, you can definitely plan to pay off your loan within 2-4 years of finishing training. 

If that’s your plan, I really recommend refinancing now. Because that means you get the low interest locked in and can start aggressively paying your loan down during residency. Check out if your program offers moonlighting. some of my seniors make 90k/year with moonlighting, which means you can really pay the interest and pay some principle down each month, which put you in a much better position than letting your loan negatively amortize (balance grow larger and larger when you are paying just IDR (Repaye, Paye, IBR) minimums).
in the even that you are seriously paying down your debt, Repaye is Not good at all because it does NOT subsidize interest at all when you pay off the interest accrued each month. In other words, your interest rate will be 6.08% on all IDR including Repaye.
But DRB refi rate can probably get you 4.5-5.5 %. 

Q6. I do not want to pay the government more than I need to, but during my time in residency, I have no confidence to go with standard or graduated or extended graduated plans since my cost of living at Houston won’t be cheap (where my radiology training will be at next year).

A6. check for moonlighting opportunities in your program
-make projected income and budget to see how much you can realistically throw at your student loans
-you may be surprised, I threw $2000/mo. at my student loans during intern year at times.

Q7. Even if you are on one of the IDR plans, you can always pay more than your monthly payment to pay quicker, right?

A7. yes, but what sucks is the interest rate.

Q8. If I am willing to pay extra monthly on top of whichever one of the IDR plans requires me to pay during my next 6 yrs., isn’t IBR the best option for me during 6 yrs. where I can pay more monthly to get rid of interests hopefully during 6 yrs. compared to other PAYE or RePAYE?

A8. if you want to pay extra, the best plan is refi, because you will have a lower interest rate to start with. Potentially 4.5%… this rate does not change and is lower than fed rates by 1.5%. Whereas Repaye says it subsidize, but rate increases anytime you make a larger payment.

Q9. I will for sure also run for moonlight opportunity during my rads residency so I will likely use that into a loan payment as extra on top of monthly loan repayment trying to pay quicker.

A9. great if there’s extra income in rads, you are well set. 
If I were you, I’ll just refinance ASAP and get the lowest interest rate I can, and start paying down VERY aggressively.

Q10. Let’s say I am on one of the IDR plans. There is no limit or restriction on me if I will change from IDR to standard 10 yr. plan, correct?

A10. definitely no restriction going from anything to standard 10 year, currently no restriction changing between IDR either. But there may be restriction in the future to change from Repaye back to Paye/IBR. 

4 Flavors of Rainy Day Fund

I have $0 emergency fund liquid savings, with the exception of periods of time when I’m trying to purchase a home and need at minimum 5% down payment, I never lend the bank my $ at lower than inflation rate in a liquid savings account. However, I understand those of us who need the peace of mind to have some liquid asset to support our loved ones when there are unexpected expenses. So I wrote about 4 sources of rainy day funds 1. with 0% interest rate for 21 months 2. with 0% fee for getting (almost) immediate cash for 15 months interest free 3. highest cash back 10% on rainy purchases you make and 4. for the highest liquid savings rate at 1.11% annual interest rate.

Some principles I recommend include:

  1. learn about how much credit limit you may get.
  2. don’t open the card until you actually need the money, this will provide you with the longest 0% interest promotional period buffer, allowing you to save up the money to pay it off.
  3. if you’d like, you can always have one card open for immediate access, and then open another card when the actual emergency hits. So the card you already open may only have 3-6 months of 0% interest promotional period on it, but you can balance transfer whatever you spend/charge on this card onto the new card you open (you usually get the card in the mail ready for activation/usage after applying on line/on the phone within 3 weeks.)
  4. cash is king, credit is queen. Smart credit use allows your cash to work harder for you. Be stingy and selective when you lend out your hard earned cash!
  • Longest Interest Free Promotional Period. Citibank Simplicity.
    • 21 months 0% interest/APR on purchases. Almost all emergencies can be paid for with credit card nowadays. So if I need to buy a 20k new roof and I want to only pay $200-400 monthly minimum until I pay the remaining balance in 20 months, I’ll use this card.
    • Alternatively, I can use the balance transfer offer, which is 3% fee on the amount balance transferred, or in an access check written to myself. 3% fee over 21 months is effectively 1.71% annual interest rate.

Citi Simplicity® Credit Card with balance transfers Citi.com

  • Easiest fast access to cash, no transaction fees for within first 60 days of opening the account. Chase slate. Simply write myself a check within 60 days of account opening date, I get completely interest free money this way. This is the only card in the market without transaction fee.

slate

  • Biggest incentive. Any card discover. Rotating 5% plus double rewards at anniversary. (10% cash rewards if you are using a particular categories.) How about a rainy day fund that pays you cash for taking care of your emergencies? 10%, not shabby. 10% on a 15k roof is $150 cash back in your pocket for being a discover customer. More cards that will reward you with cash, millage, amazon dollars, gift cards. I just like the 10% hard cold cash from discover the most.

discover

  • 1 month of liquid asset such as high interest savings 1% in online banks. Truth is I don’t have such an account, but simply don’t believe in letting banks borrow my money for 1.11% while I could keep this cash for myself in a tax-sheltered index funds making me annualized 8% over the long run (>10 years). However, I understand some need the peace of mind of having completely liquid assets. So this is a good one at least it pays the highest interest in liquid savings in the market.

Money Market Account EverBank

I hope this expends our mind a bit in the definition of rainy day fund. We work hard, it’s probably not a bad idea to put our money to work, in index funds earning potential annualized 8%, or pay or student loans, guaranteeing 7% interest savings, or pay our mortgage earning guarantee 3-4% interest savings. Or anything else that will earn us more than 0.03% sitting in BOA checking/liquid savings.

Personal finance is personal. While I’m comfortable having all my pennies in my investment (403b, roth ira, MWM’s 529, MWM’s roth IRA, my solo 401k), and nearly no cash at all in liquid assets bearing low interest to me, some may want to have 3-12 months of monthly expenses saved in a liquid account. It doesn’t need to be all or nothing. You don’t have to be an extremest like me 🙂 I hope this article open up some options for you to consider the best combination of rainy day fund for your loved ones and you!

What are your thoughts?

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