How much house?

[DrMoneyTails]

I am looking for advice as to how much house to buy!

I'm 30, married, no kids yet (planning for the next 2 years), around 50K debt, 40K in 401K, and emergency fund equivalent to 6 months of expenses.

I have 6 months until graduation, private practice job lined up, with a 2.5 year until partnership.

We are looking into purchasing a home using a doctor's loan (0% down). Our expenses after we pay our debt and not including mortgage are around 4-5K per month.

We live in an area where housing is expensive.

Assuming rent is not an option, how much house would you guys feel comfortable buying?

[Hatton]

Congrats on low debt and having started retirement savings.  I would rent.  Why?  Something like 50% of docs change jobs within 2 years of completing a residency.  I would pay off the loan and stuff the retirement accounts.  Buy the house with you make partner or when you have a positive pregnancy test.

[Kamban]

DrMoneyTails wrote:

I am looking for advice as to how much house to buy!

I’m 30, married, no kids yet (planning for the next 2 years), around 50K debt, 40K in 401K, and emergency fund equivalent to 6 months of expenses.

I have 6 months until graduation, private practice job lined up, with a 2.5 year until partnership (salary will be 270, then 285, then around 450).

We are looking into purchasing a home using a doctor’s loan (0% down). Our expenses after we pay our debt and not including mortgage are around 4-5K per month.

We live in an area where housing is expensive.

Assuming rent is not an option, how much house would you guys feel comfortable buying?

Click to expand...

Too many things that make leery of you buying a house. You have debt. You have savings but not much. You are moving into a new place. You plan to buy with 0 % down and normally these incur additional PMI payments.

Things can go wrong between now and 2.5 years later when you are supposed to become an full partner. Either you don't like them or they don't like you or it may not be a good fit once the honeymoon phase is over.  You might find that the place you buy may not have the best school district or driving times to work.

I agree with wise man hatton1. Rent for at least 6-12 months, preferably until you become a partner. Use the savings to clear debt, save the money for 20 % down and even build up taxable savings. By the time you become a full partner the picture will be much clearer on whether this is your place for long term settlement.

[conniebird]

Agree. Rent.

[LBKCLU]

I agree that renting is most likely your best option. If you have not done so already, you should check out the New York Times Buy vs. Rent Calculator http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

Kamban, keep in mind that with a Doctor Loan, no PMI is required which is one of the advantages of those programs.

Generally, WCI's rule is not to take a mortgage for more than 2X your gross income.

[Josh0731]

I've said it elsewhere on this forum, but in my own experience being inpatient and buying (actually building  :? ) a house immediately after residency was the biggest financial mistake I made in that transition.  Wound up leaving the job after 2 years and left some money on the table for sure.  I think becoming partner sounds like a great time to celebrate by buying the house your finances will allow.  You'll have a much better idea of where you are in the practice, in the local medical community, and what your longer-term finances will be like. Be patient and rent is my advice.

[DMFA]

Be patient, especially in a HCOL area.  The less you put down, the more you're indebting yourself (though the no PMI for "doctor" loan is decent), and all those closing costs will accrue interest if you roll them into the loan.  Also, you will start with negative equity with nothing down (esp with closing rolled in), which is a huge risk to begin, should you need to get out.

If you want a decent house in a HCOL area and you're putting nothing down, you'd likely have a jumbo loan if it's over a set amount (usually $417,000, but $625,500 in federally-designated HCOL areas) and those tend to be faced with slightly worse interest.  Those loans are often even more contingent on having good credit, usually defined as minimum 720 or 740 depending on the bank (these were the figures I was given when I was looking into a doctor loan 3-5 years ago).

If you end up with less house than you want for a while, especially if you'll be having children at some point, then buying is even less advisable because you'll be paying closing costs more often over a short period of time, which would make it even less worth it to buy.  The calculator Larry posted above is a great resource.  Closing costs are probably the most overlooked expense when it comes to home ownership.

Renting would give you:

• More time to put together a down payment


• More time to increase your credit score


• More flexibility to change location or house size


• Less exposure to risk of negative equity and something happening to the house


• Less lost to interest, tax, and insurance while waiting for your family size to catch up with your house

All in exchange for a slightly higher monthly payment and less flexibility with what you do to the place.  Renting is not "throwing money away" as some people deride it to be; in many circumstances, it can prevent people from wasting far more, since most of your monthly payment (especially on a 30-year loan) goes into the ether anyway in the form of interest, tax, and insurance.

All-in-all, it's a very personal decision, but you need to make it knowing all the implications involved.  Don't let HGTV sell you on the myth of home ownership being the American dream like it's some sort of nirvana.

[Zaphod]

Why would renting not be an option? Pretty good likelihood of not making the best decision if you start off with incorrect assumptions, basically pushing you into magnifying already existing confirmation bias of what you want to do anyway. You have no idea about this job yet, rent for a year or two or until you make partner really with that setup. Plus you have no kids, why tie yourself down to a place with maintenance, etc...make it simple.

[Craigy]

Definitely under $1M.  You should be able to swing a $500k, $600k house pretty easily, but buying something smaller for now will give you more freedom later.  What does that buy in your area?

But I think you can buy, assuming that $50k of debt isn't credit card debt.   :P   The rent advocates tend to live in cheap rent areas and underestimate the exorbitant cost of renting in others.  If your interest rate is low, closing costs reasonable, you're planning to stay for more than a couple of years, and you don't overpay for the house, buying is a good option.

Make all of your plans based on only guaranteed income.  Is that bump guaranteed?  If not, don't plan on getting it.  I'm not saying you won't, but very often new recruits are baited in with big performance promises and it doesn't pan out.

What sort of interest rate are you looking at?  What will property tax and insurance cost?

Just ballpark, if you assume you'll take home 65% of what you earn after state & fed, fica, health insurance, medicaid, etc. all take their cut, that's $175k, less your $5k a month of spending (do you really think your spending will stay the same...), so best case $115k left.  You should be maxing out retirement (pretax and post tax so that's a little muddy), let's just ballpark that at $30k/year for the both of you, so $85k left... so yeah you could probably swing that $1M house.

But really you don't want to do that and end up living month to month.   

[Spanky]

Rent for now. I did when starting out, and while we did buy a house about a year later, it really allowed us to assess the market, and look at houses on the market as they became available.  Because we actually closed on the house before our lease was up, it allowed us to move in gradually, mostly DIY.  We did hire a van I think it worked out well for us at the time.  Moving a second time (from the rental to the permanent home) is a pain, but not nearly as much as selling a recently-purchased house. Of course, most of what I mentioned above applied to us because we moved across the country.  If you are staying in the same local, you probably know about the local real estate market.

[PhysicianOnFIRE]

What's the name of that musical about the starving artists in NYC with the song about how many minutes in a year?

Oh yeah, RENT. I knew it would come to me, eventually. Renting isn't as bad as most people think. Here's a biased comparison from JL Collins, a kind man whom both WCI and I have met in real life.

Once you become partner, go for a million dollar mortgage if it suits you. I've heard too many horror stories of pre-partnership shenanigans to recommend taking on a bunch of debt prior to reaching that milestone.

Best,

-Physician on FIRE

 

 

 

[RocDoc]

Rent for now until you make partner. The houses will still be there!

[WealthyDoc]

I have no idea what you should do.  I would need to know a lot more about you.  I know what worked for me though.  We rented an apartment for my first job.  Then we rented a house.  Then later we bought a small house in a middle class neighborhood with 20% down and a conventional mortgage.  We later bought a larger house and paid off the mortgage.  Our last house was the most expensive and we paid cash.

[EH]

Yep, another vote for renting, sorry! We rented for a couple years to make sure the job worked out and get a better sense of the market as well as our finances. Also important to the equation is where you live and what your needs are. There is no reason to spend the maximum you can afford. We spent the minimum possible to get a 3 br in a decent school district in a very hcol area.

[Curbside Real Estate]

Hi, I was almost in the exact situation as you. I bought the home, became partner and am still in the same house today. The house has since doubled in value in the past 4 years so I'm thankful I bought when I did. So it all ended well, however, that was at a very different time and place in the housing market cycle.

Speaking to people pretty deep in this industry, the market is slowing down and interest rates aren't rising at a rapid rate, so you have some time. Let's also see what happens with this election. I tend to agree with Robert Kiyosaki who says that your primary home isn't an investment, it's a liability. Especially in HCOL areas, overextending on your home could really cripple you and extremely limit your ability to invest in other assets.

If you're getting paid through a 1099, you might have to wait for at least a year of tax returns anyways (most are 2 years) before a bank will qualify you for a physician or conventional loan.

Congrats, sounds like you have a lot of things going well for you!