Steps for Making a Big Purchase

Medical students and residents may want or need to purchase a house, a car, or other expensive items before their education or training is complete. With large purchases come valid concerns about student loan indebtedness and limited residency salaries. If large purchases are approached wisely, concerns about affording the purchase can be mitigated and may possibly be more affordable in the long run.
young couple meeting real-estate agent to buy property, presentation tablet

Preparing to Buy

Step #1: Understand and Protect Your Credit Score – Your FICO score (credit score) will determine the interest rate of your loan. A higher credit score may lead to a lower interest rate on a loan. If you need to increase your credit score, there are a number of actions to take, but keep in mind that raising your credit score may take some time, so plan accordingly.

To improve your credit score consider taking these actions:

  • Always pay bills on time.
  • Reduce the balance on your credit cards and other revolving debt.
  • Limit borrowing and avoid opening additional lines of credit.
  • Don't close accounts that have been open for a long time; they show your long-standing credit history.
  • Review your credit report for accuracy.

Note: You can review your credit report from each of the credit bureaus once per year at www.annualcreditreport.com.

Step #2: Know How Much You Can Afford – Knowing what you really can afford hinges on having a current and accurate budget. Once you determine the amount of a comfortable monthly payment that fits within your budget, then it’s time to move to the next step.

The Buying Process

Step #3: Shop for a Loan – Yes, it seems backwards, but it makes the most sense to shop for a loan before you shop for the item. By comparing lenders and their loan products, you will be able to find the best deal, and have a clear understanding of the total cost (fees, points, rates, etc.) associated with the big purchase. If a pre-approval letter is needed during your purchase, the lender can provide it to you. (Note: Limit shopping for a loan to a short span of time to avoid unnecessarily lowering your credit score because of the number of inquiries.)

Step #4: Shop for your Big Purchase – Depending on the item, professional assistance may be required during this step. For a home purchase, a licensed real estate agent may be needed (especially if you are unfamiliar with the area). For a car purchase, a trusted mechanic may be called upon to inspect your potential choice. When a final selection has been made, there may be negotiations, paperwork, additional inspections, etc. Often, the most stressful time will come at the tail-end of the transaction.

Things to Avoid:

Don’t agree to a payment or product that makes you uncomfortable. Know your budget and understand the terms and conditions of the loan product.  If you don’t understand something, be sure to ask questions.

Other Tips:

  • When buying a car, try to buy a used car. As soon as you leave the dealership in a new car, it becomes a used car and the value significantly decreases.

  • Reducing your monthly debt payments may increase your eligibility for a loan. This means forbearance on student loans may help you qualify for a more expensive house or car. But, be wise -- when your residency ends, the house, car, and student loan bills will all need to be paid each month, so budget and spend accordingly.

  • Consider your future financial needs and wants. Be sure you have an emergency fund in place and that you are taking retirement savings and other financial responsibilities (like insurance, repairs, maintenance, etc.) into consideration before making the large purchase.

Other Resources

Buying a House: www.hud.gov/buying/ or www.consumerfinance.gov/owning-a-home/
Buying a Car: www.edmunds.com/cars or www.kbb.com 

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