Deciding how much house you can afford comes down to balancing lifestyle and long-term financial goals. You want a home that fits your life, but not at the cost of becoming house poor and sacrificing savings, investing, or other priorities. A common rule of thumb is to keep your mortgage under two times your gross income, with some flexibility up to three to four times in high-cost areas, though that comes with tradeoffs. Another helpful guideline is to keep total housing costs under 20% of your gross income, which better accounts for changing interest rates and overall affordability.
It’s important to remember that just because a bank will lend you a large amount does not mean you should take it. Lenders may approve debt-to-income ratios up to 43%, but that leaves little room for taxes, savings, and other expenses. Stretching too far often leads to reduced retirement savings and financial stress. Your credit score does play a role in securing a good mortgage rate, but it is far less important than your savings rate and overall financial health. Simply paying your debts on time is usually enough to maintain a strong score.
Beyond the purchase price, homeownership comes with many additional costs like taxes, insurance, maintenance, and furnishings, which can add up quickly. Comparing rent to just the mortgage is misleading. A key factor in deciding whether to buy at all is how long you plan to stay. Because transaction costs can total around 15% of a home’s value, it typically takes about five years for appreciation to offset those costs. For shorter stays, renting is often the better financial choice, especially for those early in their careers or in temporary positions.
This is the White Coat Investor Podcast, Financial Bootcamp, your fast track to financial success. How much house can you really afford? What are we balancing here? Well, you don't want to be house poor and have all your wealth and income tied up in the place you live in.
But you also want to be able to enjoy as nice of a house as you can and as nice of an area, as nice of a school district as you can while still being able to meet your other financial goals. And so people often have this dilemma, how much should I buy? Because the sky really is the limit when it comes to buying a house. You can spend millions and millions and millions of dollars on a house. On the other hand, you
You can often rent a place, a one-bedroom apartment or a studio apartment, for really not that much money in a lot of areas of the country. So there's a huge range. And people want to know, how much can I spend? How much should I spend? And that's hard to say because it's such a personal decision. It requires you to apply your values to your financial life and decide what you really care about. Because when you spend more on a house...
You have to spend less on something else, whether that's saving for your future or giving money away or just spending on other things, cars, vacations, other activities you enjoy, clothing, whatever. So let's provide a few rules of thumb for you. In general, I recommend you keep your mortgage to less than two times your gross income. So if you're making $300,000 a year, that would suggest you keep your mortgage to less than $600,000 per year.
So if you want to buy a million dollar house and you have a $300,000 income, that would suggest you put down $400,000 in order to buy that house. And that's a pretty good rule of thumb. Obviously, when interest rates are really low, your payments are lower than they are when interest rates are really high. And that's just a rule of thumb. It doesn't come with an interest rate adjustment of any kind. But obviously, some people do feel a need to stretch their
that rule, particularly when they live in a high cost of living area. Bear in mind, when we're talking about stretching that rule, we're talking about 3 to 4x your gross income, not 10x. If you buy a house that's 10x your gross income, you're going to regret it. You're going to end up in foreclosure and having to fire sale that house or short sale that house. Please don't do that.
At three to four X, you're going to be making some sacrifices, right? You might be working longer, for instance, before you can retire. You're going to spend less on vacations. You're going to spend less on, you know, nice cars or private schooling or whatever. There's going to be some sacrifices, but it may be doable. You know, when you talk about this number, this 20% of your gross income, what that is really is a debt to income ratio or DTI.
And if you look at the mortgage industry, you will find that people are willing to give you a mortgage for up to 43% of your income. In your debt to income, all of your debts together, what it costs you to service them and pay them compared to your income is up to 43%. But just because a bank will let you borrow that much doesn't mean you should borrow that much. Oftentimes, the percentage is lower.
when it comes to just a mortgage, like 28 to 35% debt to income ratio. But I'm telling you, if you're spending 35% of your gross income as a doc on housing, there's not going to be a lot left over.
for you to spend or for you to save to meet your other financial goals, right? Because you got to assume 25, 30, 35% of your money is going to taxes. Okay. So you got to live and save on the rest of that. And if you're trying to save 20% of your gross income for retirement, like I recommend you do, that's not going to leave a whole lot for you to live on. So what happens? People don't save for retirement, end up being house poor. You don't want that.
Another useful rule of thumb that might be a little more useful in times of different interest rates is the 20% rule, where you are only using 20% of your gross income
for your housing costs, right? Mortgages, insurance, taxes, HOA, and utilities, less than 20% of your gross income. And I think that's a pretty good rule of thumb as well. And that adjusts with interest rates, unlike the 2X ratio that I mentioned earlier. Okay, so what determines how much house you can afford? Well, your debt to income
matters. And your credit score does have an influence on this because it affects what interest rates you can get and whether you can borrow money at all. Now, I hate to see people worshiping at the altar of the FICO score, right? This is not your financial GPA. Your credit score is far from the most important number when it comes to your finances. Your savings rate matters a whole lot more. Your net worth matters a whole lot more.
But when it comes to getting a mortgage or borrowing money, they care about your I love debt score, AKA your credit score. So you do want to pay a little bit of attention to it. But honestly, it doesn't take much to have a great credit score. Having one credit card that you put your gas on every month and have it paid off automatically out of your bank account is probably enough. And most doctors have far more debt than that, especially if they borrowed from medical school. So you don't have to do anything special most of the time to have a really high credit score
other than pay your debts as you agreed to do. And that's really the main component when it comes to credit scores. But if you're on the borderline, you can do some research on other ways to improve your credit score to get it up a few points and get that best possible interest rate available to you when you're going for a mortgage.
Don't forget that there are other costs when it comes to owning a home. One of the dumbest things you can do is say, hey, my mortgage is less than rent. It must be a good idea to buy. That's the dumbest way to think about buying a home out there. Okay. Don't do that. There are lots of other costs associated with owning a home besides the mortgage.
Think about it like a real estate investor, right? If you're a real estate investor, you got to pay all the expenses using rent. And then you're hoping there's something left over for profit. What are all those expenses? Well, if you've never owned a home, it's a lot more than you might think, right? There's closing costs and property taxes and homeowners insurance, flood or earthquake insurance in some areas. You might have to pay private mortgage insurance or PMI.
You might have to pay for maintenance and utilities. You got to get a new snowblower and a lawnmower and a snow shovel and brooms and all this stuff. It can be really expensive to own a home, you know, not even to mention furnishing it with drapes and furniture and all those kinds of things. Okay. So don't forget all that when it comes to owning a home. Okay. The rent is supposed to be much higher than the mortgage. You cannot just compare the mortgage to the rent.
The key in deciding whether you should be buying a home at all instead of renting is how long are you going to be there? Because you need that home to appreciate enough to offset the transaction costs of buying and selling a home. Those are typically about 15% of the value of a home. Maybe 5% to get in, 10% to get out. More or less, that's a pretty good rule of thumb for what it's going to cost. So it's a half a million dollar home.
We're talking about $75,000 round trip. You need it to appreciate $75,000 while you're in it, or else you're going to come out behind on buying that home. And how long does that take to appreciate $75,000? Well, on average, it's going to take about five years. So if you're going to be in a home for five plus years, it almost always makes sense to buy it.
If you're going to be in there for less than five years, you're rolling the dice, right? At five years, it's a 50-50 proposition. At three years, it probably works out a third of the time and doesn't work out two thirds of the time. If you're going to be in there for a year or two, you're really gambling. Yeah, houses might go crazy in that year while you're in it.
But you're going to need them to just to make up for those transaction costs. So in general, buy a house when you're in a stable personal and professional situation where it looks like you're going to be able to stay in that house for at least five years. And that can make a lot of sense.
So what does that mean for people in medical training? Well, lots of residencies are only three years long, or a fellowship might only be one to three years long. Those are not periods of time where you're likely to come out ahead, despite the urge to feel like you've made the American dream by buying a house. So don't get suckered into buying a house for a one, two, three-year period that ended up regretting it. Now, lots of docs do this. I can't talk them out of it most of the time.
And the truth is they usually end up being okay. But the reason why they're okay is because their new attending salary rescues them. They can afford to pay that mortgage on the old rental house or on the old residency house and whatever new house they're moving to just because they have this new higher income.
but that doesn't make it a good financial decision. Don't be so afraid to rent that you make a bad decision. You can rent a house just like you can rent an apartment. It can have a fence. You can have pets. Don't use all these silly excuses to buy a house you shouldn't be buying in the first place. Make an informed decision.
The New York Times has a pretty handy buy versus rent calculator you might want to plug your numbers into. But if you put in typical numbers, you're going to find what I've told you is true. That three to five plus years is what it's going to take for you to be coming out ahead on this home with any sort of reasonable assumptions. Now, as a brand new attending, you should keep in mind that about 50% of docs change jobs within two or three years of finishing their training.
That means there's a good chance you're going to be moving. There's a good chance that new job isn't going to be in the same geographic area. So it's okay to rent for a little while when you get to that new place, six months, even a year. It's often easier to get a contract for a year. Make sure you actually like the job. Make sure the job actually likes you. If you're in a partnership track, make sure it looks like they're actually going to make you partner before buying a house. And that makes a lot of financial sense.
Okay, now what if you don't have 20% to put down? Are you stuck paying private mortgage insurance or PMI? Remember, this is the insurance you pay to protect your lender from you defaulting. It doesn't do any good at all for you. But classically, if you put down less than 20%, you have to pay it.
However, there are doctor mortgages or physician mortgages out there, and they're available to some other types of high-income professionals as well. We have a whole list of them at whitecoatinvestor.com you can check out, where you can put down less than 20% and not pay PMI. Maybe that's not a good idea to put down less than 20%, because that 20% not only helps you avoid PMI, but it helps you, in case you have to sell that house in a year or two, not be underwater on it.
But if it makes sense for you to buy and you have a better use for your money, like paying off student loans or maxing out retirement accounts, it might make a lot of sense for you to get a doctor mortgage loan and use that money you have for a down payment for something else. So tread carefully, but it's not an unreasonable thing to do. Hope that helps you understand how much house you can afford, as well as some of the best practices when it comes to buying your first or even a later house in your life.
The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.
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