Can I afford a home?

[Behind the Curve]

Hello my smart colleagues. I am financially illiterate and have just started to learn as much as possible about finances. Right now, I'm facing a home buying dilemma and could use some advice.

Situation:
Age: 41
New attending making 200K in HCOL academics, take-home is about 9-10K/month after taxes, contributions/benefits
Wife: executive assistant making 40K
Apartment rent: 2950/month (HCOL)
Expenses: 500/month
Two Cars: paid off
Savings: 16K
401K me: 30K (lived in HCOL area for residency)
401K wife: 90K
Credit card debt: spent the past 6 months paying it ALL off, done
Student loans: 300K, completed 5 years of PSLF (on year 6 now)

Dilemma:
After 5 years of wanting to start our family and two miscarriages, we want to go the surrogacy route which is a costly endeavor, about 150K is average nationally.
We also want to buy a house. We've been looking for a while, but didn't want to buy until our credit card debt is paid off which it is now. We have identified three houses we really like, but I'm hesitant. It'll be my first house as I was born and raised in apartments in NYC and we were always poor so I don't know the first thing about home ownership. Wife is more confident and believes we can afford it. What do you all think?

All three houses are in the 550 - 650K range and all come with a 40 minute commute for me. Anything closer to work would be minimum of 800K which I know we can't afford.

With the houses we're considering, the monthly payment for mortgage and taxes would be in the $3000 range, so roughly what we're paying now. But the houses are older (one built in the 80s and other two built in 1998 and 2002) so I'm concerned about things going wrong, like a new roof or something breaking that needs repairs. Wife is thinking we'll pay the exact same as in the apartment and if a little extra, we can still afford it. I guess I'm just nervous knowing that we're saving up for surrogacy.

What say you?

[TXDoc21]

It sounds like saving up more money for a down payment and continuing to rent is the best option to me. How much could you put toward a down payment right now? Do you love your job? Any chance you’ll move? It looks like you have 16K for an e-fund, but no other down payment fund.

I’ll say I enjoy owning a home because no one can tell me what to do at my house. But there are always things breaking and getting contractors out to fix things. Could you try renting a house to see how it goes?

Welcome to the forum!

[Andrew Musbach]

It really comes down to cash flow and any other goals you have/are saving toward and what's most important to you. Here is a rough outline of the thought process I go through of taking the moving parts and then trying to distill it down into something more tangible to make some of these decisions and understand tradeoffs.

1) I always recommend first starting with your retirement goal - when do you want to retire or be "financially independent" and how much do you think you'll spend at that point? Then, understand how much you need to save in order to reach that goal. If you're on track, or ahead of schedule with your current savings toward retirement, then you have more flexibility to spend/save more for other goals (college savings, house payments, etc.) from your cash flow. If you're not, then you want to make sure you increase the savings there, or decide if you're comfortable with the idea of pushing retirement back a couple years.

2) After you know you're on track for retirement and have an intentional plan there, you want to understand your monthly cash flow and any other goals you may be saving for like paying for college and factor in what's required to meet those. You'll also want to factor in future potential expenses, surrogacy, future childcare expenses like daycare,etc.

3) If you're on track to meet the different goals you have in the future, and additional expenses, then it's understanding your monthly cash flow and deciding the impact certain decisions you make will have on it and your comfort level with that. If you had a $3,000/mo house payment all-in, and you still know you'll have extra cushion each month without ever feeling stretched or stressed out, then you can decide what you want to do with the extra cash flow you have. You could save even more toward retirement to get ahead of schedule or you may decide you'd be comfortable spending more of it, which means you could be comfortable with having a larger monthly mortgage payment and buy the house closer to work. That time on the commute may be worth buying the more expensive house if the rest of your lifestyle is modest. Having said that, buying "too much house" is one of the biggest mistakes people can make if it stretches their cash flow too much each month and that's never a fun feeling because you'll constantly be feeling behind.

Not every decision you make has to be the financially "optimal" decision, but you do need to make sure you're staying on track for retirement. It's just figuring out the right balance of saving enough for the future while enjoying life along the way.

From a high level review, at 41 and with your current retirement savings, without knowing your future plans, I'd say you are a behind with retirement savings and I'd focus on making sure you have a plan to save enough there first. From there, I'd build up more of an "emergency fund" cushion in a savings account for any of those one-off expenses that could come up over time. Since you don't have money saved up for a down payment, if you did a $600k physician loan with 0% down and assumed you had a 3.25% rate (which it'd probably be higher at that size), your principal/interest payments alone would be ~$2,600/mo, without factoring insurance or real estate taxes, so I'd make sure you understand exactly what the all in costs would be for your mortgage (along with any other potential costs like renovations or things breaking). While it's not ideal, it may be worth continuing to rent for 1-2 more years and build up a down payment / get ahead of some of the other savings and reassess how cash flow feels given you just had the increase in salary.

[Behind the Curve]

Thank you guys for the thoughtful advice.

To answer a few questions, we want to get a 0 down physician's loan.

Retirement: yes, I'm very behind. But we're maxing out retirement accounts now. I'm not part of the FIRE movement and anticipate will need to work 25 years or more which I'm ok doing. I chose a specialty I love and is doable to do parttime without losing too much. I'm going to be building up a private practice on the side with one of my mentors, but wanted to settle the house thing first because location will be dependent on where I am.

Since July, we've been putting 6K/month into paying back credit card debt (we had over 40K in CC debt). Now that the CC's are all 0 and we've made a commitment to budget ourselves $500/month for fun stuff (which includes entertaining/eating out), then $5500 goes to whatever we want. This is after we've made 3-4K/month to retirement and savings. The reason the nest egg is low is because of the money we were spending on the CCs. I also have to factor in that once the CARES Act ends, I'll go back to paying $300/month on student loans until I re-certify in summer 2021 and then I don't know what my loan payment will be.

So bottom line, after a 3K home payment each month and retirement contributions, we'll have 5-6K left over for saving/investing, student loan, and fun spending (budgeted 500/month).

You still think renting is the way to go and just saving the 5-6K/month?

[Andrew Musbach]

Thanks for the feedback here. Loving the day job and being comfortable working longer makes the retirement savings goal much more manageable. Everyone is different with what's most important to them / the things they want to spend money on - some people splurge on cars, travel, eating out/entertainment, or a nicer house. It sounds like the home is the most important "splurge" for both of you and you're committed to cutting other areas, so that also helps with being able to buy the house sooner than later.

1) I'd make sure you know you're on track for PSLF and meeting those requirements to avoid any potential surprises. You can run a quick calculation based on your income / repayment plan online to check what it would be based on your income after re-certifying.
2) I'd double check the all in costs of the physician loan with the house you're looking at between closing costs and principal, interest, taxes, insurance.
3) I'd make sure you know any potential maintenance on the home you'd have to do or potential large costs with renovations on the home
4) I'd boost up the emergency fund to at least $30k just as a buffer to avoid any credit card debt in the future

Each month you delay buying the house, you can save up a bigger cushion, and confirm you're really comfortable only spending $500/mo on entertainment (especially in the post-covid world when you can actually do things). Again, not giving specific advice here for compliance purposes, but if you feel comfortable with everything (savings plan for retirement, on track with PSLF, comfortable with monthly cash flow factoring in increase loan payments/home costs/any future increased expenses/limiting other "entertainment" costs) then you at least did your due diligence and can know the numbers all work out where you won't feel any financial stress. Which at that point, you should enjoy what's most important to you and your wife and not feel bad or guilty about spending your money on something you'd enjoy.

[childay]

Thank you guys for the thoughtful advice.

To answer a few questions, we want to get a 0 down physician's loan.

Retirement: yes, I'm very behind. But we're maxing out retirement accounts now. I'm not part of the FIRE movement and anticipate will need to work 25 years or more which I'm ok doing. I chose a specialty I love and is doable to do parttime without losing too much. I'm going to be building up a private practice on the side with one of my mentors, but wanted to settle the house thing first because location will be dependent on where I am.

Since July, we've been putting 6K/month into paying back credit card debt (we had over 40K in CC debt). Now that the CC's are all 0 and we've made a commitment to budget ourselves $500/month for fun stuff (which includes entertaining/eating out), then $5500 goes to whatever we want. This is after we've made 3-4K/month to retirement and savings. The reason the nest egg is low is because of the money we were spending on the CCs. I also have to factor in that once the CARES Act ends, I'll go back to paying $300/month on student loans until I re-certify in summer 2021 and then I don't know what my loan payment will be.

So bottom line, after a 3K home payment each month and retirement contributions, we'll have 5-6K left over for saving/investing, student loan, and fun spending (budgeted 500/month).

You still think renting is the way to go and just saving the 5-6K/month?

Why do you feel you need to buy a home? Surrogacy may take quite some time. Do you have embryos on ice? Even with an infant you don't "need" a house until at least toddler age. What is current commute vs 40m from potential houses?

[CordMcNally]

I haven’t done the math but just eyeballing it makes me think you’ll probably need to do more than just max out your retirement accounts.

[Lordosis]

Paying back CC debt is not saving.
you need to save 20% of your gross for retirement.
You should be making a pslf side fund that would approximate your payoff amount in 5 years.

Sounds like you skipped the live like a resident part.

You want it all right now but cannot afford it all right now. Just because you can pay for it all does not mean that you can afford it.

You are not even back to a 0 nw yet. Take it easy. Figure out the 1 or 2 things that are important and spend some money on that. But wait for the rest until you can afford it.

If having a child is the top then focus on that. A house can wait.

Also. A mortgage payment is the floor of expenses. If it is similar to your rent then the house is way more costly. Add in maintenance, furnishings, decor, repairs,commute costs, taxes, insurance, and yes the lifestyle inflation that will come with it.

Sorry to be a downer. Keep working. Grow your income. You will get there.

[Tim]

NO.
NW ($190k) Thinking about another $150k debt for the child (not including) any costs of the child rearing and 5 years to PSLF?
You want to add a mortgage too?
Mortgage 2x gross is the ROT.
You are underwater now. Rent until you reach the surface in 5 years. The child thing, is such a personal choice that in not way would I throw shade on that. Just come up with a plan to pay it off.
Rent for 5 years and get your retirement savings up to 20% and your loans paid off.
IF you have managed a down payment fund , you might be able to swing it.
The intent is not to be rude, but to throw cold water on your house dream in the immediate future. Digging a debt hole potentially.

[wideopenspaces]

Before you buy a house:
*3-6 months of expenses in an emergency fund.
*20% of gross income to retirement. Since you are behind you might shoot for more like 25%.
*10k for moving expenses, furnishing the house.
*20k to start off your home maintenance fund. You should save 1-3% of the home value per year to cover all the stuff that will inevitably go wrong.
*20% downpayment although sounds like you are skipping this part

So I'd get your savings up to 70k (40k EF +10k home furnishing +20k home maintenance) Before buying. Which means you should rent at least another year, maybe longer depending on how much more you need to put to retirement to get on track there.

However, when do you want to do surrogacy? If you wait to buy a house for a year so you are at least somewhat financially prepared, it will take another 2-3 years to save 150k for surrogacy. Then once you have baby you need outside of work life insurance and you add in daycare costs.

Personally, I'd do surrogacy first, then save for house and wait to buy until after those student loans are gone.

[Behind the Curve]

Thanks for the feedback here. Loving the day job and being comfortable working longer makes the retirement savings goal much more manageable. Everyone is different with what's most important to them / the things they want to spend money on - some people splurge on cars, travel, eating out/entertainment, or a nicer house. It sounds like the home is the most important "splurge" for both of you and you're committed to cutting other areas, so that also helps with being able to buy the house sooner than later.

1) I'd make sure you know you're on track for PSLF and meeting those requirements to avoid any potential surprises. You can run a quick calculation based on your income / repayment plan online to check what it would be based on your income after re-certifying.
2) I'd double check the all in costs of the physician loan with the house you're looking at between closing costs and principal, interest, taxes, insurance.
3) I'd make sure you know any potential maintenance on the home you'd have to do or potential large costs with renovations on the home
4) I'd boost up the emergency fund to at least $30k just as a buffer to avoid any credit card debt in the future

Each month you delay buying the house, you can save up a bigger cushion, and confirm you're really comfortable only spending $500/mo on entertainment (especially in the post-covid world when you can actually do things). Again, not giving specific advice here for compliance purposes, but if you feel comfortable with everything (savings plan for retirement, on track with PSLF, comfortable with monthly cash flow factoring in increase loan payments/home costs/any future increased expenses/limiting other "entertainment" costs) then you at least did your due diligence and can know the numbers all work out where you won't feel any financial stress. Which at that point, you should enjoy what's most important to you and your wife and not feel bad or guilty about spending your money on something you'd enjoy.

Thank you for the help!

[Behind the Curve]

Why do you feel you need to buy a home? Surrogacy may take quite some time. Do you have embryos on ice? Even with an infant you don't "need" a house until at least toddler age. What is current commute vs 40m from potential houses?

We want to buy a house because we hate renting. I've rented all my life and hate it. So as another poster said, it's a splurge for us but I'm also 41 and want to finally put down roots, stay in one place and buy a home. We're using donor eggs d/t wife's miscarriages. Current commute is 20 min. With the house, commute will double but I feel it's worth it to come home to a house.

[Behind the Curve]

I haven’t done the math but just eyeballing it makes me think you’ll probably need to do more than just max out your retirement accounts.

Why? We're also saving.

[Behind the Curve]

Paying back CC debt is not saving.
you need to save 20% of your gross for retirement.
You should be making a pslf side fund that would approximate your payoff amount in 5 years.

Sounds like you skipped the live like a resident part.

You want it all right now but cannot afford it all right now. Just because you can pay for it all does not mean that you can afford it.

You are not even back to a 0 nw yet. Take it easy. Figure out the 1 or 2 things that are important and spend some money on that. But wait for the rest until you can afford it.

If having a child is the top then focus on that. A house can wait.

Also. A mortgage payment is the floor of expenses. If it is similar to your rent then the house is way more costly. Add in maintenance, furnishings, decor, repairs,commute costs, taxes, insurance, and yes the lifestyle inflation that will come with it.

Sorry to be a downer. Keep working. Grow your income. You will get there.

We ARE saving 20% of gross. I make 200K so 40K. I said we're putting 3-4K/month away for retirement. I have been living like a resident to pay back CC debt (6K/month isn't easy unless you're living like a resident). I'm going to ride out PSLF and no debt other than that. Cars are paid off. We don't entertain much, we don't buy lots of things. We don't live an extravaggant life but in a HCOL area where our families are. The houses we're looking at are around 1500 sq ft so definitely not buying a "doctor house". Does that change things?

[Behind the Curve]

NO.
NW ($190k) Thinking about another $150k debt for the child (not including) any costs of the child rearing and 5 years to PSLF?
You want to add a mortgage too?
Mortgage 2x gross is the ROT.
You are underwater now. Rent until you reach the surface in 5 years. The child thing, is such a personal choice that in not way would I throw shade on that. Just come up with a plan to pay it off.
Rent for 5 years and get your retirement savings up to 20% and your loans paid off.
IF you have managed a down payment fund , you might be able to swing it.
The intent is not to be rude, but to throw cold water on your house dream in the immediate future. Digging a debt hole potentially.

I don't get it. Am I calculating the retirement thing wrong? You're the second poster to say that, but I am putting away 3-4K to retirement. On a 200K salary, isn't that 20%?