Resident's Guide to Buying a Home and Using the Doctor's Loan
Explanation of the Doctor's Loan
I think this might be one of the most helpful sections of the entire document as loans in general are difficult to understand. You are going to have to take my word for it that the doctor's loan is the best loan for residents that are intending to purchase a new home. A lot of banks have stopped providing this loan, but there are still several banks that do provide this loan. If any realtor tells you that this loan is no longer in existence please call the bank yourself to find out for sure. The reason why the doctor's loan even exists is due to the fact that physicians have extremely low default rates. Whether it is job security, the amount of pay, or simply our type A personalities, doctors tend not to default on their loans. Thus, banks will lend us money with lower interest rates and without private mortgage insurance because there is a very good chance that we will pay it back. In general, a true doctor's loan should have a low interest rate, no private mortgage insurance and have eligibility for 100% of the purchase price of the house.
Also note that at this point in time there have been certain areas of the country designated as declining housing areas. For these areas you need to pay a 5% down payment in order to obtain the doctor's loan. Call your lender to find out if the city that you are looking at is in such an area.
Okay now the details.
Interest Rate
As noted earlier, depending on the market, the interest rate will change constantly until you lock in a rate. However, there are options that you have in locking in the rate. You can either choose to lock in a rate for 30 or 60 days. The bank would rather lock you into a rate for 30 days than 60 days because there is less likely to be significant variability over 30 days compared to 60 days. That being said, I was given the option of a 60-day rate lock with a 1.00% origination fee or a 30-day rate lock with a 0.00% origination fee, which would have been a difference of 2,000 dollars at closing. However, I went with the 60-day rate lock and was able to bargain the origination fee down. Keep in mind that the rate and points change daily depending on the 10-year Treasury Bond price and it certainly is possible to be offered a 60-day rate lock with no points at all.
You may have also heard of a way in which you can buy down a rate. That basically means they offer a rate of 6.0% with 0.00% discount point or you could get a 5.625% rate with 1.00% discount point. Here is an example of a quote regarding interest rates and the doctor's loan.
30yr Fixed Rate Doctor Loan Program w/ Discount Point
- 5.625% with 1.00%
- 5.75% with .75%
- 5.875% with .50%
- 6.00% with .25%
- 6.125% with .00%
Lastly, there is an option of locking in a rate and purchasing what is called a float down option. This is basically to lock into a rate and have the one-time option of floating down to a lower rate if it becomes available. I am honestly not sure how much cost this adds to the loan. I have been told that it is usually not worth the extra cost.
Discount Point/Origination Fee
This is one of my favorite aspects of the loan process that people don't like to tell you about. You can think of these terms as one in the same. Basically they represent a percentage of the purchase price of the house that is paid up front to get a certain interest rate. To confuse you, the lender will either say the origination fee is 1% with a 6.0 percentage rate or a 6.0 percentage rate with 1 point. Remember that this discount point/origination fee is paid at closing. So if you purchase a $200,000 house with a 1% discount point you will need to pay an additional $2,000 at closing.
Fortunately this is a major area where banks try to compete with each other. If you use the process stated above you can certainly bargain down any points associated with your loan. In my case, I was able to get a 60 day rate lock with a 0.5% discount point rather than a 1% discount point, which saved me $1,000 at closing. Keep in mind that the more your house costs, the more significant bargaining down the discount point becomes, and vice versa.
Additional Bank Fees
The Origination Fee/Discount Point is considered a bank fee, but there is also a general fee paid to the bank. This will be consistent within a lending institution but can vary greatly between them. For example, one lender charged a standard $1,000 bank fee and another charged $912. It was not until I looked into what the actual fee was for that I realized the true difference. Bank of America charged a $912 fee that included a $200 application fee, an $11 Flood Determination Certificate, an $82 dollar Tax Lien Service Fee and a $619 Combined Processing and Appraisal Fee. The other lender did not include an appraisal in their $1000 fee that can cost around $400. Although the differences do not end up being significant, the point is that you should always ask what the lender's fee includes. In general, the fee should be somewhere around $1000 dollars.
Private Mortgage Insurance
This is often abbreviated (PMI). It is essentially a payment that you make to purchase insurance on your loan. In a sense, if you end up defaulting on your loan the company to whom the bank was making your PMI payment will cover the bank for the loss. This should not be apart of any doctor's loan at all. As we discussed, medical students and residents are a low risk population and the bank is willing to forgo the PMI payment for this particular population. Certainly your loan is insured, but that is something the bank and their insurance company will decide. A lender may state that every loan has to have insurance, which is true, but the doctor's loan does not require you to pay any PMI.
There is a trick that some lenders will try to pull in order to say that their loan has no PMI. They will simply offer you a loan with a much higher interest rate to give the appearance that no PMI is being paid. In actuality, the cost of the PMI is simply being rolled into the higher interest rate of your loan. For example, one lender told me that he could either give me a 6.0% loan with an additional PMI of $160 a month or a 7.5% loan with no additional PMI payment. Fortunately, it is easy to spot this trick because your rate will be much higher than expected. The rate you are quoted should be very competitive and have no PMI payment at all.
Written by: Randon T. Hall & Ben Rosenbaum, Copyright © 2008