BUYING A HOUSE AS A PHYSICIAN CAN BE A VERY EXCITING PROCESS. Everyone is happy to work with us because we have a job that society considers very stable, and lenders love to lend to us because we tend to make payments on time. Because of the large salaries of physicians, we are often told by lenders that we can afford large mortgages, but you might ask yourself “How much home can I afford?”
But tread with caution. A home is one of the largest purchases we will ever make. Making the wrong decision and buying more house than we can truly afford can set us up to live paycheck to paycheck and constantly be stressed about money. This trap is easy to fall into for several reasons.
The “doctor lifestyle” trap
Lenders often leave out student loans when calculating our debt-to-income ratios. But student loan payments are a part of our reality and can have a payment equal to a mortgage in our monthly cash flow. Thus, the lender’s calculation of what we can afford can be severely overestimated.
There are multiple sectors of the real estate industry that benefit when we buy a house at the top of our budget. The bank charges higher closing costs and collects more interest, the real estate agent makes a higher commission, the insurance companies charge a higher premium, the town gets higher taxes, the contractors get more work—and this all costs us more money. So, incentives between those advising us can be misaligned with our best interests.
There are many hidden costs to home ownership. Not only do we have to pay the mortgage, but also closing costs, insurance, taxes, the HOA, repairs, maintenance, landscaping, cleaning, utilities and furnishings. These costs all increase as our homes and mortgages get bigger.
As our fixed expenses rise, we have less money for discretionary expenses like experiences and travel, and less to invest for our retirement and financial freedom.
How to avoid overspending
First, try not to borrow the maximum amount the lender will lend you. To come up with a better idea of how much house we can actually afford, it helps to start with the big picture first. When would we like to reach financial independence? How long do we want to take to pay off the house? How important is square footage to us? How much room do we want to have between income and expenses for things like travel and investing? What are our family’s plans for having kids and taking parental leave? What are some must-haves that the family has for the house? What are the negotiables? Once we answer these questions, the answers will become clearer.
To get a better idea of what payment we can afford, we should run our numbers ourselves. Having a good understanding of household cash flow is critical here. Start with the monthly take-home pay for the household, then subtract expenses including food, transportation, student loan payments, discretionary spending and desired travel. Then, subtract the desired monthly contributions to retirement accounts, savings, and other investing. Estimate the utility, insurance, repair and maintenance costs of the new home. After subtracting the above from the take-home pay, we can get a better understanding of what monthly payment we can actually afford.
Homeownership can be a blessing and a wise investment for many. But it’s important not to overstretch. Take the time to calculate the mortgage you can actually afford while meeting your other financial goals. •