Odd (good) financial situation starting residency - how much house to buy?

[awesomesauce]

Long time lurker of these forums, coming to ask for some advice/perspective as my significant other is starting MS4 and beginning to think about residency:

We have gotten lucky in that I worked in a high-paying job while SO was in medical school. We outright own a house, worth ~$300k, in a hot (seller-friendly) housing market. No debt at all (student or otherwise). About $50k in savings and another $50k in retirement accounts. Being 30, we're probably a bit behind on retirement savings, but we are debt-averse and wanted to pay off the mortgage.

We'd like for me to stay home with (future, potential) children while SO is looking at a combined residency/fellowship program (SO is an MD/PhD) that will take 5 years. So assuming my income is zero, but we have this pile of at least $300k in cash on-hand (once we sell this house), and SO is making a resident's salary, how much house could we reasonably afford to buy?

I know that buying a house in residency is generally "bad", but we really hate renting, and will likely be in the same place for 5 years. Also, we tend to spend quite a lot on living expenses.

My calculations lead me to think that we could afford about $750k on a 5/1 ARM.

Any thoughts on that, or other sage advice about our financial situation as we begin this rocky ride?

[Hatton]

Are you and SO planning to marry at some point?  What do you mean by we spend a lot on living expenses?  Is the SO planning an academic career?

[awesomesauce]

Good questions, thanks. Yes, we are in a sable, committed marriage. I mention living expenses because it seems like we spend about $3k/mo on all non-housing related expenses, which seems a little high (but, whatever - we enjoy good food). SO is not planning an academic career - she is going into a sub-specialty where average starting salaries hover around $300k.

[Hatton]

I would not commit 750k to a house at this point.  I would max out your 401ks, backdoor roths, and maybe even a taxable account.  Your wife is 5 years out from making 300k.  Presumably she will try to juggle residency and pregnancy.  You also have a high paying job.  You got lucky with your first house.  I think it would be very hard to deal with home maintenance issues, residency, working on a PHD, and a pregnancy at the same time. There is plenty of time to buy a house when things are more certain with your job situation.

[awesomesauce]

I agree that we got VERY lucky with our first house.

 

That said, I will be giving up my job when she starts residency (we need to move, and my job is not telecommute-able), I'm exceptionally handy with maintenance issues and home improvement, and she already has the PhD. Our desire is to upgrade homes, have me stay home and take care of cooking/cleaning/maintenance/kids, and she'll only have to deal with residency (and pregnancy). If we decide against kids, I'll try to find a new job, but we'd like to not need to rely on my employment to make the mortgage payments.

In light of that, is $600 or $700k on an ARM unreasonable?

I've found this to be a difficult to answer question, as most of the financial advice for residents is aimed at those with ~$300k debt. We're in the odd situation of having a ~$400k net worth, starting residency.

[Allonblack]

How much appreciation is there on your 300k house? I believe there is a tax advantage to selling and buying a new house, rather than selling a house and investing it.

 

As for what you can afford, I just plugged in making 50k a year combined in NJ (You didn't mention a state so I just picked one.) Your take home would be 39700 a year. If you continue to spend 3k a month on non-housing related expenses you will have 3700 A year for mortgage.  Did you mean 750K post-residency? Or do you plan on using the 300k not only as a downpayment, but also as a source to pay off your mortgage cost? If so that won't happen. They're not going to lend you 750k on a 50 k a year income regardless of how much of a stockpile you have. What happens if you blow it all on cocaine and roulette? (I've had this issue with landlords, they consider a job safer than savings for paying rent) Even if you could find someone to lend you the money, you're playing with fire.

So what can you afford? Going by the conventional wisdom that 15% of your gross can go to mortgage. If you put down 200k you can afford a 300k house. If you put down 300k, you can afford a 380000 dollar house. I wouldn't do either of the above, but there you go.

[Hatton]

Agreed your situation is better than most people who post who are just starting residency.  I am always cautious about houses because it is so easy to lose money on the transaction.  The house price seems high to me.  You may be in a really high COLA however.  It seems wiser to me to buy a larger house after you have kids.  You also want to make sure your wife likes her residency program as well.

[EH]

Also really not clear on how you will afford 3k/month living expenses in addition to a huge mortgage on a resident's salary. Your living expenses are only going to go up when you have kids, so not sure where all of that money is going to come from. Given you are starting out from a good place, I would want to continue to live within my means and start paying into retirement rather than spending all of our net worth to buy a very expensive house now.

[East coast]

Curious as to how you made the math work to presume a bank would loan that amount for a house at that price point given an income of $50-$60k? I think Allonblack and EH hit the nail on the head.

 

[awesomesauce]

East coast wrote:

Curious as to how you made the math work to presume a bank would loan that amount for a house at that price point given an income of $50-$60k? I think Allonblack and EH hit the nail on the head.

 

Click to expand...

Well, assume a resident's income of $50k/yr, and assuming we "supplement" our income over the next 5 years with the $300k we make selling our home, that gives us another $50k/yr (I realize a bank may not be OK with this). A 5/1 ARM on a $600k loan is <$3k/mo in payments. Seems very reasonable? And that assumes I don't work and SO doesn't moonlight.

 

I don't mean to argue with anyone - I genuinely appreciate the wise advice, and realize that I'm suggesting something that is probably generally seen as financially imprudent. But let me ask: if a (hypothetical, different) resident went and got a "doctor loan" to buy a house, is he really using it to buy a $150k fixer-upper (because that's all he qualifies for at a $50k/yr income)?

We've lived frugally as "grad students" for over a decade and have some net worth to show for it - I have a hard time believing that the next house we can buy is nearly the same house as can be bought by a resident with $300k in debt.

[EH]

Right, but for a loan your income is 50K, not 100K. You can take out the same loan as another resident with a 50K income, although you have the advantage of being able to put down a larger downpayment to increase the size of the house. This doesn't get you anywhere near 750k though I don't think.

[Hatton]

Maybe you should get a job which will make it easier to qualify for a mortgage of any type.  Your wife is not yet pregnant.  It may not happen right away.  As WCI frequently says you can have it all but not right away.

[The White Coat Investor]

awesomesauce wrote:

Long time lurker of these forums, coming to ask for some advice/perspective as my significant other is starting MS4 and beginning to think about residency:

We have gotten lucky in that I worked in a high-paying job while SO was in medical school. We outright own a house, worth ~$300k, in a hot (seller-friendly) housing market. No debt at all (student or otherwise). About $50k in savings and another $50k in retirement accounts. Being 30, we’re probably a bit behind on retirement savings, but we are debt-averse and wanted to pay off the mortgage.

We’d like for me to stay home with (future, potential) children while SO is looking at a combined residency/fellowship program (SO is an MD/PhD) that will take 5 years. So assuming my income is zero, but we have this pile of at least $300k in cash on-hand (once we sell this house), and SO is making a resident’s salary, how much house could we reasonably afford to buy?

I know that buying a house in residency is generally “bad”, but we really hate renting, and will likely be in the same place for 5 years. Also, we tend to spend quite a lot on living expenses.

My calculations lead me to think that we could afford about $750k on a 5/1 ARM.

Any thoughts on that, or other sage advice about our financial situation as we begin this rocky ride?

Click to expand...

Sorry, that's insane. $750K on an income of $50K is crazy, even if you have $300K. What are you planning to do with the $300K? Put it down? Use it to gradually pay the mortgage? You guys are way ahead of the typical doc but it seems like you'll "catch up" to them quickly by consuming your advantage in higher living expenses.

If you guys really want to buy, how about a $250K house that you put $50K down on? Or a $400K house that you put $300K down on? Those seem like more reasonable options to me.

[Gas_Doc]

Out of curiosity, what is the state of the real estate market in your future town? Are we talking San Francisco-type real estate where $750k gets you a 1 Bed/1Bath 600 sq ft condo, or is there a (unnecessary) need to "treat yo' self" with a 5000 sq ft mansion? Frankly, I agree with everyone else that it would be ill-advised to spend $750k on a house with a household income of $50k/year. Why buy as much home as possible when it's just the two of you?

[awesomesauce]

I appreciate the feedback. Sounds like we should scale back our plans.

 

Nonetheless, it still feels "weird" to me that (assuming nothing goes massively wrong), SO will have a ~$300k/yr job in 5 years - a salary that easily (and reasonably) buys a $1M house - yet despite being able to make a ~50% downpayment, we would be ill-advised to buy a "stepping stone" house along the way to that "mansion".

I know the more prudent folks here advocate for retirement savings and equity investments, but, well, we didn't train for this long just to retire as soon as possible. And what else is there to do with that kind of money? Some people like boats, we like houses.