Good Decision/Bad Decision

Today’s subject will hopefully be part of a regular series of Monday posts.  As you recall, I recently started Gratitude Wednesdays.  This series will focus on my past decisions to shed light on some financial wins and losses.  My hope is to discover what I did right, and help others avoid my mistakes.  Whether epic fail or triumphant victory, these were my decisions. The topic for today is The Doctor Loan.

Are you in the market to buy a house?  Do you have a down payment?

Good Decision

My wife and I wanted to buy a house.  I was finishing my internship and had two years left in St. Louis before moving along to our next  destination.  Although owning a property for two years seems like a poor investment, the housing market, at the time, was hot and we felt confident that there was money to be made.  There was only one problem, of course, the down payment.

We had some funds at the time, but they were tied up in under-priced assets and neither of us wanted to take a bath on the sale.  So where were we going to come up with the money?

The answer was a little known perk of having the letters M and D plastered next my name.  The Doctor Loan or doctor’s mortgage was a program through Bank of America where physicians obtained loans in a manner unlike just about any other professional.

These types of loans are available through a variety of lenders.  Generally the terms are pretty similar:

• Anywhere from 0-10% down
• Student debt is excluded from the loan calculation
• Usually no mortgage insurance (PMI)
• Will accept a contract as evidence of future earnings.

After finding a house, the process took less than 48 hours (things were a little easier back then in the late 1990’s).  We had a quick closing, and moved in without paying a single  cent down.  We bought the house for $150K and sold it two years later for $203K.

There is no better indicator of having made a good decision than walking away with a $53K check after two years.

Bad Decision

There were several reasons why using The Doctor Loan was actually a risky proposition.  What then I felt was making a savvy investment, I now recognize as rank speculation.  We saw an opportunity in a hot market, and heavily leveraged ourselves to take advantage of it.

If the market went south, we would have been stuck in quite a conundrum.  Given that there were only two years left in my program (and I had no interest in staying into St. Louis), our residence had an expiration date regardless of how inopportune the economy became.

By sheer luck, it all worked out.

There was another major downside to this type of loan.  It was expensive.  While average mortgage rates were a whopping 7% at the time, we paid 8%.

An older, more financially educated me, realizes that buying a house during residency is probably not the right time.  During these difficult years, who wants to spend energy worrying about mowing the lawn, paying taxes, and general upkeep.  Furthermore, a physician-in-training should have the agility to pick up and move to another city without being concerned about what has to be left behind.

Generally to get the most of your primary residence, you want to own it for decades, not a few years.

In Summary

We came across The Doctor Loan at just the right time.  The real estate market aligned with an opportunity to obtain fast and inexpensive cash.  We signed our name on the dotted line, lived in the property for two years, and then sold for a massive profit.

In retrospect, we had the luck of youth.

There is no way I would take such a risk now after all I have learned about personal finance.

How about you?  Have you any experience with The Doctor Loan?  What youthful indiscretions did you make with your first mortgage?