Physicians often celebrate a big jump in income by buying a new home. However, that new salary may not stretch as far as you think once you factor in student loans, retirement savings, and other priorities.
If you know how much house you can truly afford, when physician loans help, and when renting is the smarter move, you’re prepared to make this decision the right way.
In this short video, we explore tips and tactics to help you confidently approach buying a home as a new attending. Watch now!
Transcript
Buying a Home As a New Attending Physician
One of the ways to reward yourself once you’ve become an attending is to buy a new home. And so let’s spend a little bit of time and talk about that. Because that new money that you’re making seems like it’s going to go so far because it’s a lot more than what you were making as a resident, but it may not be as far as you think it will take you.
Hi, I’m Ben Martinek with Bona Fide Finance, and I am a financial advisor that primarily works with physicians. I just want to give you some details as we’ve been working with clients over the many years on that new pay raise that you’re experiencing, especially when it comes to the question of house affordability.
Why Your New Physician Income May Not Go As Far As You Think
You may think, oh, my gosh, I’m making so much more money than I was just last year. My income may be going up by 5x. And so let’s go and buy ourselves a new home. And I would say, okay, let’s do that. That’s probably a good idea, especially if you’re going to be in the home for more than five or seven years, you’re likely to come out money ahead.
Whose Interests Does Your Realtor and Lender Serve?
But the truth is, the people who work in the Realtor and banking business love to sell you a lot of house because that’s where they’re compensated and they make all of their money. And so their interest and your interest may not be fully aligned. Their desire of how much house they’d like to sell you may not be what’s in your best financial interest. You might be able to afford the payment, is what I’m trying to say, but it starts to stretch you against other priorities that you may have.
Other Expenses That Compete With Your Mortgage
So let’s just think and run through these numbers a little bit, because besides having a new financial housing obligation, a new mortgage payment of which you can’t afford, you also have to add in some other expenses that may be new, such as student loan payments or saving for retirement, which has been deferred and delayed until you finally have come into some extra money.
And since it takes a long time to become a physician and there’s a bit of a late start careerwise, we have a little bit less time to save for long-term wealth accumulation, to get all that student loan debt addressed, to maybe start putting money aside for college savings accounts, to be putting money toward retirement. We don’t want to overcommit ourselves to a house that may mean we have to continue to wait and delay ourselves, but we want to make sure this house stays affordable because one of the key aspects of all finances is making sure that we maintain optionality in those finances.
How Much House Can a Physician Actually Afford?
So let’s say we’re in a situation in which you have $300,000 salary that you’re operating from. What’s the right amount that you should be looking for a home purchase? It would be somewhere in which the mortgage payment is roughly 20-25% of your gross income. So $300,000 of income, that means a $5,000-$6,000 monthly mortgage payment should be fairly doable and recommended.
Why You Should Ignore the Lender’s Maximum
That’s not the same amount that you might get proposed with by a lending officer. They might push you as high as 33 or even 36% of your gross income. And even though they’ll say yes to that, I would tell you you need to say no to that because 20-25% is more reasonable given your other commitments.
Are Physician Loans a Good Idea?
Now, many times you’ll also get offered physician loans. Those physician loans are great, good for you. I’m glad you’re able to take advantage of them and put them to good use. You’ll usually have little to no down payment associated with them. You may not pick up any private mortgage insurance, which means additional cost for not having enough of a down payment on the home purchase. You may even get a little bit better interest rates and they’ll oftentimes not even include your student loan obligations as part of your overall financial picture.
Physician loans are great and wonderful. Let’s just not use them as a reason to go out and buy a house.
Renting vs. Buying: When Renting Is the Smarter Choice
At the end of the day, home ownership is not necessarily better than renting. It may be the case, especially given your current place in your career, that you should rent for now, even though you are making a lot more money instead of buying. You’re not necessarily just losing by renting because there are fixed costs in home ownership in which the money spent there doesn’t come back to you either, much like it does in a rental arrangement.
So if you’re not going to be able to stay in your current location for a while—let’s say it’s just unknown as to where you may go from here and you might only be here for the next couple of years—my overall recommendation here is don’t buy a house. It would be, just keep renting. It’s not until we’re able to stay in a location for five, seven, maybe 10 years that we can start to have confidence that yes, home ownership is the right course of action for you.
Talk With a Financial Advisor for Physicians
Well, I hope you have found these considerations very helpful and beneficial. If you’d like to meet with us to discuss how we can help you in planning your finances, we’d love to meet. You can reach out to hello@bonafidefinance.com and we can schedule an intro call.